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Optimal allocation of tradable emission permits under upstream-downstream strategic interaction

Author

Listed:
  • Joana Resende

    (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain, CETE - Universidade do Porto = University of Porto)

  • Maria Eugénia Sanin

    (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique)

Abstract

In this paper we account for the fact that Cournot equilibrium strategies in the sector under environmental regulation depend on firms'interaction in the permits market (and vice versa). In this context, we show that the cost-effective allocation of permits between firms must compensate the cost-rising strategies exercised by the stronger firm (in the output market). Then, taking into account the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability that serves as an indicator for the de- gree of price competition. The simulation allows us to determine how output market characteristics affect differently optimal permit allocation depending on the regulator's objective.

Suggested Citation

  • Joana Resende & Maria Eugénia Sanin, 2009. "Optimal allocation of tradable emission permits under upstream-downstream strategic interaction," Working Papers hal-00437645, HAL.
    • Handle: RePEc:hal:wpaper:hal-00437645
    Note: View the original document on HAL open archive server: https://hal.science/hal-00437645
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    References listed on IDEAS

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    1. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    2. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
    3. Nils-Henrik Mørch von der Fehr, 1993. "Tradable emission rights and strategic interaction," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 3(2), pages 129-151, April.
    4. Pedro Linares & Francisco Javier Santos & Mariano Ventosa & Luis Lapiedra, 2006. "Impacts of the European Emissions Trading Scheme Directive and Permit Assignment Methods on the Spanish Electricity Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 79-98.
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    7. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
    8. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-271, May.
    9. Eftichios Sartzetakis, 1997. "Tradeable emission permits regulations in the presence of imperfectly competitive product markets: Welfare implications," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 9(1), pages 65-81, January.
    10. Yihsu Chen & Benjamin Hobbs & Sven Leyffer & Todd Munson, 2006. "Leader-Follower Equilibria for Electric Power and NO x Allowances Markets," Computational Management Science, Springer, vol. 3(4), pages 307-330, September.
    11. Giuseppe De Feo & Joana Resende & María Eugenia Sanin, 2013. "Emission Permits Trading And Downstream Strategic Market Interaction," Manchester School, University of Manchester, vol. 81(5), pages 780-802, September.
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    Cited by:

    1. Tanachai Limpaitoon, Yihsu Chen, and Shmuel S. Oren, 2014. "The Impact of Imperfect Competition in Emission Permits Trading on Oligopolistic Electricity Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. da Silva, Patricia Pereira & Moreno, Blanca & Figueiredo, Nuno Carvalho, 2016. "Firm-specific impacts of CO2 prices on the stock market value of the Spanish power industry," Energy Policy, Elsevier, vol. 94(C), pages 492-501.
    3. Hintermann, Beat & Peterson, Sonja & Rickels, Wilfried, 2014. "Price and market behavior in Phase II of the EU ETS," Kiel Working Papers 1962, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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