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Market Power in Pollution Permit Markets

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  • Juan-Pablo Montero

Abstract

As with other commodity markets, markets for trading pollution permits have not been immune to market power concerns. In this paper, I survey the existing literature on market power in permit trading but also contribute with some new results and ideas. I start the survey with Hahn’s (1984) dominant-firm (static) model that I then extend to the case in which there are two or more strategic firms that may also strategically interact in the output market, to the case in which current permits can be stored for future use (as in most existing and proposed market designs), to the possibility of collusive behavior, and to the case in which permits are auctioned off instead of allocated for free to firms. I finish the paper with a review of empirical evidence on market power, if any, with particular attention to the U.S. sulfur market and the Southern California NOx market.

Suggested Citation

  • Juan-Pablo Montero, 2009. "Market Power in Pollution Permit Markets," The Energy Journal, , vol. 30(2_suppl), pages 115-142, December.
    • Handle: RePEc:sae:enejou:v:30:y:2009:i:2_suppl:p:115-142
    DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-6
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    References listed on IDEAS

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    1. Amundsen, Eirik S. & Nese, Gjermund, 2004. "Market Power in Interactive Environmental and Energy Markets: The case of Green Certificates," MPRA Paper 10559, University Library of Munich, Germany.
    2. Erin T. Mansur, 2007. "Do Oligopolists Pollute Less? Evidence From A Restructured Electricity Market," Journal of Industrial Economics, Wiley Blackwell, vol. 55(4), pages 661-689, December.
    3. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, October.
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