Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power

Julien Chevallier

Working Papers from HAL

Abstract: Stemming from politically given market imperfections in a tradable permits system, this paper develops a Stackelberg game with two types of non-cooperative agents to describe how a large -potentially dominant- agent may exercise market power at the expense of a competitive fringe. In a dynamic framework with full forward and backward temporal flexibility (i.e. 1:1 Intertemporal Trading Ratio), this intra-industry model then suggests an optimal allocation criterion for grandfathered permits based on recent emissions. This paper contributes to the permit trading literature by shedding some light on the decision to allow banking and borrowing, a debate which is typically overlooked by the debate to introduce the permits market itself among other environmental regulation tools. Provisional results are presented under perfect information.

Keywords: emissions trading; banking; borrowing; market power; differential game; marché de permis d'émissions négociables; stock de permis; emprunt de permis; pouvoir de marché; jeu différentiel (search for similar items in EconPapers)
Date: 2009-01-15
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00124713v1
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