Market Power and Instrument Choice in Climate Policy

CRREP working paper serie 2017-04

46 Pages Posted: 22 May 2018

See all articles by Bell Mbea

Bell Mbea

Université Laval - Département d'Économique

Sylvain Dessy

Université Laval - Département d'Économique

Date Written: March 01, 2017

Abstract

This paper compares a clean energy standard (CES) and a carbon tax (CT), using theory and quantitative experiments. A two-stage duopolistic competition in the electricity sector between a polluting plant and its non-polluting rival anchors the model underlying these experiments. The CT induces both plants to contribute to clean electricity, whereas the CES only incentivizes the non-polluting plant. Ultimately, what matters for the ranking of these instruments is the size of the pre-existing competitive gap between the two rival plants. When this gap is sufficiently small, the CES becomes the more cost-effective instrument, irrespective of the pre-specified emissions reduction target.

Keywords: Electricity, Cost-effectiveness, Duopoly, Innovation, Quantitative analysis.

JEL Classification: H20; H32; L13; L51

Suggested Citation

Mbea, Bell and Dessy, Sylvain, Market Power and Instrument Choice in Climate Policy (March 01, 2017). CRREP working paper serie 2017-04. Available at SSRN: https://ssrn.com/abstract=3175319 or http://dx.doi.org/10.2139/ssrn.3175319

Bell Mbea (Contact Author)

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada

Sylvain Dessy

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada

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