Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

Francisco André and Luis M. de Castro

No 197636, Climate Change and Sustainable Development from Fondazione Eni Enrico Mattei (FEEM)

Abstract: It has been shown in prior research that cost effectiveness in the competitive emissions permit market could be affected by tacit collusion or price manipulation when the corresponding polluting product market is oligopolistic. We analyze these cross market links using a Stackelberg model to show that under reasonable assumptions, there are no incentives to collude for lobbying prices up. However, incentives for manipulating the price of permits up appear if there is an initial free allocation of permits, which is a policy argument against grandfathering and in favor of auctioning. This effect is increasing with the amount of permits allocated to the leader. Moreover, the changes for price manipulation increase with those changes that tend to undermine the leader's advantage in output production or to reduce the leader’s abatement cost.

Keywords: Environmental Economics and Policy; Political Economy (search for similar items in EconPapers)
Pages: 31
Date: 2015-02-03
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Citations: View citations in EconPapers (1)

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Working Paper: Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemcl:197636

DOI: 10.22004/ag.econ.197636

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