Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

Francisco André and Luis M. de Castro
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Luis M. de Castro: Universidad Complutense de Madrid, Spain

No 2015.06, Working Papers from Fondazione Eni Enrico Mattei

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: Emissions Permits; Collusion; Market Power; Duopoly; Stackelberg Model (search for similar items in EconPapers)
JEL-codes: D43 L13 Q58 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-com, nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
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:fem:femwpa:2015.06

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