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Does environmental regulation create merger incentives?

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  • Creti, Anna
  • Sanin, María-Eugenia

Abstract

This paper studies merger incentives for polluting Cournot firms under a competitive tradable emission permits market. We find that when firms are symmetric and marginal costs are constant, an horizontal merger is welfare enhancing if efficiency gains are high enough for the merger to take place. The presence of a competitive (or monopolistic) outside market that also trades in the permits market makes profitable a merger that would not happen otherwise. When firms are vertically related in an input-output chain, an horizontal merger in one of the markets increases profits in the other market due to the permits price decrease. Finally we consider an oligopoly-fringe model in which firms differ in their marginal production costs. A merger between the dominant oligopolistic firms decreases the permits price and is always profitable. Such setting is relevant to assess the observed mergers between power generators in several market for permits, like the Regional Greenhouse Gas Initiative (RGGI), allowing us to derive some policy recommendations.

Suggested Citation

  • Creti, Anna & Sanin, María-Eugenia, 2017. "Does environmental regulation create merger incentives?," Energy Policy, Elsevier, vol. 105(C), pages 618-630.
    • Handle: RePEc:eee:enepol:v:105:y:2017:i:c:p:618-630
    DOI: 10.1016/j.enpol.2017.01.057
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    Cited by:

    1. Garcia, Arturo & Leal, Mariel & Lee, Sang-Ho & Park, Chul-Hi, 2024. "Merger incentive and strategic corporate social responsibility by a multiproduct corporation," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 193-206.
    2. Luis Gautier & Mahelet G. Fikru, 2024. "Are Big Mergers Welfare Enhancing When There Is Environmental Externality?," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 145-173, Springer.
    3. Xu Dong & Yali Yang & Qinqin Zhuang & Weili Xie & Xiaomeng Zhao, 2022. "Does Environmental Regulation Help Mitigate Factor Misallocation?—Theoretical Simulations Based on a Dynamic General Equilibrium Model and the Perspective of TFP," IJERPH, MDPI, vol. 19(6), pages 1-21, March.
    4. Luis Gautier & Mahelet G. Fikru, 2024. "Electric Utility Mergers in the Presence of Distributed Renewable Energy," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 63-92, Springer.
    5. Luis Gautier & Mahelet G. Fikru, 2024. "Welfare Impact of New Firm Acquisition," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 105-132, Springer.
    6. Hu, Jun & Fang, Qi & Wu, Huiying, 2023. "Environmental tax and highly polluting firms' green transformation: Evidence from green mergers and acquisitions," Energy Economics, Elsevier, vol. 127(PB).
    7. Choi, Pak-Sing & Espinola-Arredondo, Ana & Munoz, Felix, 2020. "Mergers as an environmental ally: Socially excessive and insufficient merger approvals," Working Papers 2020-1, School of Economic Sciences, Washington State University.
    8. Choi, Pak-Sing & Espínola-Arredondo, Ana & Muñoz-García, Félix, 2022. "Environmental policy helping antitrust decisions: Socially excessive and insufficient merger approvals," Resource and Energy Economics, Elsevier, vol. 67(C).
    9. Chuyuan Zhang & Sang‐Ho Lee, 2023. "Foreign passive ownership and tariff‐induced free technology transfer under vertical integration," Manchester School, University of Manchester, vol. 91(2), pages 89-117, March.
    10. El Ouardighi, Fouad & Sim, Jeongeun & Kim, Bowon, 2021. "Pollution accumulation and abatement policies in two supply chains under vertical and horizontal competition and strategy types," Omega, Elsevier, vol. 98(C).

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    More about this item

    Keywords

    Mergers; Environmental externality; Tradable emission permits; Social welfare; Cournot competition;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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