IDEAS home Printed from https://ideas.repec.org/p/pav/demwpp/013.html
   My bibliography  Save this paper

Optimal Allocation of Tradable Emission Permits under Upstream-Downstream Strategic Interaction

Author

Listed:
  • Giuseppe De Feo

    (Department of Economics and Management, University of Pavia and University of Strathclyde)

  • Joana Resende

    (University of Porto and Cef.up)

  • Maria Eugenia Sanin

    (University of Montpellier)

Abstract

In this paper we analyze environmental regulation based on tradable emission permits in the presence of strategic interaction in an output market with differentiated products. We characterize firms' equilibrium behavior in the permits and in the output market and we show that both firms adopt "rival's cost-rising strategies". Then, we study the problem of the regulator that aims to maximize social welfare, proposing an efficient criterion to allocate permits between firms. We find that the optimal allocation criterion requires a perfect balance between the difference on firms' price-cost margins in the permits and the difference on firms' mark ups in the output market. In light of 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.

Suggested Citation

  • Giuseppe De Feo & Joana Resende & Maria Eugenia Sanin, 2012. "Optimal Allocation of Tradable Emission Permits under Upstream-Downstream Strategic Interaction," DEM Working Papers Series 013, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:013
    as

    Download full text from publisher

    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0013.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    5. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    6. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 345-356.
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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).
    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. 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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    2. Makoto Tanaka, 2012. "Multi-Sector Model of Tradable Emission Permits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 51(1), pages 61-77, January.
    3. Jean J. Gabszewicz & Skerdilajda Zanaj, 2008. "Upstream Market Foreclosure," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 13-26, January.
    4. Creti, Anna & Sanin, María-Eugenia, 2017. "Does environmental regulation create merger incentives?," Energy Policy, Elsevier, vol. 105(C), pages 618-630.
    5. Karbowski, Adam, 2019. "Greed and fear in downstream R&D games," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 32, pages 63-76.
    6. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.
    7. André, Francisco J. & de Castro, Luis M., 2015. "Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition," Climate Change and Sustainable Development 197636, Fondazione Eni Enrico Mattei (FEEM).
    8. Gérard Gaudet & Ngo Van Long & Antoine Soubeyran, 1999. "Upstream-Downstream Specialization by Integrated Firms in a Partially Integrated Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(4), pages 321-335, June.
    9. Pascale Phelinas & Sonia Schwartz, 2017. "Regulating transgenic soybean production in Argentina," Working Papers halshs-01656924, HAL.
    10. Javier D. Donna & Pedro Pereira, 2024. "Structural Presumptions for Non-horizontal Mergers in the 2023 Merger Guidelines: A Primer and a Path Forward," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(1), pages 303-345, August.
    11. Remes, Piia, 2013. "Putting a Price on Carbon – Econometric Essays on the European Union Emissions Trading Scheme and its Impacts," Research Reports 62, VATT Institute for Economic Research.
    12. Laurent Linnemer, 2000. "When Backward Integration by a Dominant Firm Improves Welfare," Working Papers 2000-42, Center for Research in Economics and Statistics.
    13. 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).
    14. Mattoo, Aaditya, 1999. "Can no antitrust policy be better than some antitrust policy?," Policy Research Working Paper Series 2191, The World Bank.
    15. Zanchettin, Piercarlo & Mukherjee, Arijit, 2017. "Vertical integration and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 25-57.
    16. Roberto Hernán González & Praveen Kujal, 2012. "Vertical integration, market foreclosure and quality investment," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 11(1), pages 1-20, April.
    17. Francisco J. André & Luis Miguel de Castro, 2020. "Market Power in Output and Emissions Trading," Games, MDPI, vol. 11(4), pages 1-22, October.
    18. Sonia Schwartz & Hubert Stahn, 2014. "Competitive Permit Markets and Vertical Structures: The Relevance of Imperfectly Competitive Eco-Industries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 69-95, February.
    19. Choi, Jay Pil & Yi, Sang-Seung, 2016. "An equilibrium model of investment-reducing vertical integration," Research in Economics, Elsevier, vol. 70(4), pages 659-676.
    20. Simshauser, Paul & Tian, Yuan & Whish-Wilson, Patrick, 2015. "Vertical integration in energy-only electricity markets," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 35-56.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pav:demwpp:013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alice Albonico (email available below). General contact details of provider: https://edirc.repec.org/data/dppavit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.