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Does emission permit allocation affect CO2 cost pass-through? A theoretical analysis

M. Wang and Peng Zhou ()

Energy Economics, 2017, vol. 66, issue C, 140-146

Abstract: Carbon emissions trading may result in CO2 cost pass-through and its rate is influenced by a number of factors. This paper theoretically investigates how emission permit allocation affects CO2 cost pass-through rate by developing a Nash-Cournot oligopolistic market equilibrium model. We find that the derived CO2 cost pass-through rates are consistent when grandfathering and auctioning rules are used for permit allocation, which are higher than that for benchmarking rule. It has also been found that the magnitude of CO2 cost pass-through rate is relevant to the type of definition, product market structure and average carbon intensity of the industry. We suggest that policy makers first use benchmarking rule to attract firms to participate at the early stage of emissions trading system (ETS) and then take auctioning rule when ETS is well developed.

Keywords: Emissions trading; Cost pass-through; Cournot oligopoly; Permit allocation; Market structure (search for similar items in EconPapers)
JEL-codes: C61 Q54 L13 C44 C70 Q50 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.eneco.2017.06.011

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