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Market Power with Interdependent Demand: Sale of Emission Permits and Natural Gas from Russia

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  • Cathrine Hagem
  • Steffen Kallbekken
  • Ottar Mæstad
  • Hege Westskog

Abstract

With implementation of the Kyoto Protocol, Russia will most likely be able to exert market power in the emission permit market. But, as Russia is also a big exporter of fossil fuels, the incentives to boost the permit price may be weak. However, a significant share of Russia’s fossil fuel exports is natural gas. If a high permit price boosts the demand for natural gas through substitution from more polluting fuels and thus increase gas profits, this may increase the incentives to exert monopoly power in the permit market. Moreover, a large fossil fuel exporter may use its market position to influence the effective demand for permits. Hence, the relationship between permit income and fossil fuels exports runs in both directions. In this article, we explore the interdependence between the revenues from permit and fossil fuel exports both theoretically and numerically. A computable general equilibrium model suggests the fact that Russia as a big gas exporter has small effect on the incentives to exert monopoly power in the permit market. Moreover, Russia’s monopoly power in the permit market has a small, but non-negligible impact on the optimal level of Russian gas exports. Copyright Springer 2006

Suggested Citation

  • Cathrine Hagem & Steffen Kallbekken & Ottar Mæstad & Hege Westskog, 2006. "Market Power with Interdependent Demand: Sale of Emission Permits and Natural Gas from Russia," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 34(2), pages 211-227, June.
    • Handle: RePEc:kap:enreec:v:34:y:2006:i:2:p:211-227
    DOI: 10.1007/s10640-005-6206-0
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    References listed on IDEAS

    as
    1. Steffen Kallbekken & Hege Westskog, 2005. "Should Developing Countries Take on Binding Commitments in a Climate Agreement? An Assessment of Gains and Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 41-60.
    2. Hagem, Cathrine & Mæstad, Ottar, 2003. "Market power in the market for greenhouse gas emissions permits - the interplay with the fossil fuel markets," Memorandum 34/2002, Oslo University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Christoph Böhringer & Ulf Moslener & Bodo Sturm, 2007. "Hot air for sale: a quantitative assessment of Russia’s near-term climate policy options," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 38(4), pages 545-572, December.
    2. Chen, Jiandong & Xie, Qiaoli & Shahbaz, Muhammad & Song, Malin & Wu, Yuliang, 2021. "The fossil energy trade relations among BRICS countries," Energy, Elsevier, vol. 217(C).
    3. Dudek, Daniel J. & Golub, Alexander A. & Strukova, Elena B., 2006. "Should Russia increase domestic prices for natural gas?," Energy Policy, Elsevier, vol. 34(13), pages 1659-1670, September.
    4. Cathrine Hagem, 2008. "Incentives for merger in a noncompetitive permit market," Discussion Papers 568, Statistics Norway, Research Department.
    5. Jaehn, Florian & Letmathe, Peter, 2010. "The emissions trading paradox," European Journal of Operational Research, Elsevier, vol. 202(1), pages 248-254, April.
    6. Hecking, Harald & Panke, Timo, 2015. "The global markets for coking coal and iron ore — Complementary goods, integrated mining companies and strategic behavior," Energy Economics, Elsevier, vol. 52(PA), pages 26-38.

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    More about this item

    Keywords

    climate policy; emission permits; market power; natural gas; Q4; D58; L12; Q28; Q48;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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