The effect of emission permit allocation in an early-stage cap-and-trade for a duopoly market

Yanfang Zheng, Wenhui Zhou, Xi Chen and Weixiang Huang

International Journal of Production Research, 2021, vol. 59, issue 3, 909-925

Abstract: Cap-and-trade systems, or emission trading systems (ETS), are increasingly adopted by countries and regions to provide economic incentives for reducing greenhouse gas emissions. The majority of existing ETS are early-stage systems implemented in and after 2013. These early-stage ETS are typically characterised by a focus on few industry sectors, and the employment of free emission allocation schemes including grandfathering and benchmarking. In this paper, we investigate the impact of emission allocation schemes in an early-stage cap-and-trade system in a duopoly market. We show that benchmarking scheme may lead the energy-efficient firm to reserve part of its emission permits, while firms always use up their after-trading permits under grandfathering. We also find that a more stringent emission cap may increase firms' profits rather than decreasing them under both allocation schemes, suggesting a possible cause for windfall profits observed in early-stage ETS. Benchmarking is found to lead to lower emissions compared to those under grandfathering, while it may result in higher or lower firm profits, consumer surplus, and the overall social welfare. Furthermore, under either allocation scheme, allowing emission trading does not affect the total emissions, while it can increase firm profits and consumer surplus and therefore the overall social welfare.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://hdl.handle.net/10.1080/00207543.2020.1711986 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:tprsxx:v:59:y:2021:i:3:p:909-925

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/TPRS20

DOI: 10.1080/00207543.2020.1711986

Access Statistics for this article

International Journal of Production Research is currently edited by Professor A. Dolgui

More articles in International Journal of Production Research from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().