Market Power in Emission Permit Markets: Theory and Evidence

26 Pages Posted: 12 Nov 2013

See all articles by Beat Hintermann

Beat Hintermann

University of Maryland - Department of Agricultural & Resource Economics

Date Written: October 31, 2013

Abstract

A well-known result about market power in emission permit markets is that efficiency can be achieved by full free allocation to the dominant firm. I show that this result breaks down when taking the interaction between input and output markets into account, even if the firm perceives market power in the permit market alone. In fact, the dominant firm may have an incentive to inflate the permit price even if it receives no free permits at all. I examine the empirical evidence for price manipulation by large electricity firms during Phase I of the EU ETS. I find that the pattern and extent of firms’ allowance holdings are consistent with strategic price manipulation, and they appear unlikely to be the result of precautionary purchases due to carbon risk.

Keywords: emission permit market, market power, cost pass-through, price manipulation

JEL Classification: H320, Q480, Q530, Q540, Q580

Suggested Citation

Hintermann, Beat, Market Power in Emission Permit Markets: Theory and Evidence (October 31, 2013). CESifo Working Paper Series No. 4447, Available at SSRN: https://ssrn.com/abstract=2353279 or http://dx.doi.org/10.2139/ssrn.2353279

Beat Hintermann (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
121
Abstract Views
908
Rank
492,053
PlumX Metrics