On emissions trading and market structure: cap-and-trade versus intensity standards

De Vries, Frans P. and Dijkstra, Bouwe R. and McGinty, Matthew (2014) On emissions trading and market structure: cap-and-trade versus intensity standards. Environmental and Resource Economics, 58 (4). pp. 665-682. ISSN 1573-1502

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Abstract

This paper examines the interdependence between imperfect competition and emissions trading. We particularly analyze the long run equilibrium in a two-sector ("clean" and "dirty") model with Cournot competition among firms who face a fixed cost of production. The clean sector is defined as the sector with the highest long run cost margin on emissions. We compare the welfare implications of a cap-and-trade scheme with an emissions trading scheme based on relative intensity standards. It is shown that a firm's long run equilibrium output in the clean or dirty sector does not depend on the emissions trading format, but only depends on the fixed cost of producing in the respective sector. Intensity standards can result in clean firms selling allowances to dirty firms, or dirty firms selling to clean firms. The former outcome yields higher welfare. It is demonstrated that cap-and-trade outperforms the intensity-based trading scheme in terms of long run welfare with free entry and exit. With intensity standards the size of the clean sector is too large.

Item Type: Article
Additional Information: This is a post-peer-review, pre-copyedit version of an article published in Environmental and Resource Economics. The final authenticated version is available online at: http://dx.doi.org/10.1007/s10640-013-9715-2
Keywords: Cap-and-trade; Emissions trading; Imperfect competition; Industrial change; Intensity standards; Pollution control
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: https://doi.org/10.1007/s10640-013-9715-2
Depositing User: Dijkstra, Bouwe
Date Deposited: 18 Dec 2017 11:17
Last Modified: 19 Dec 2017 03:36
URI: http://eprints.nottingham.ac.uk/id/eprint/48766

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