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Technology Adoption in Emission Trading Programs with Market Power

In this paper we study the relationship between market power in emission permit markets and endogenous technology adoption. We find that the initial distribution of permits, in particular, the amount of permits initially given to the dominant firm, is crucial in determining over- or under-investment in relation to the benchmark model without market power. Specifically, if the dominant firm is initially endowed with more permits than the corresponding cost effective allocation, this results in under-investment by the dominant firm and over-investment by the competitive fringe, regardless of the specific amount of permits given to the latter firms. The results are reversed if the dominant firm is initially endowed with relatively few permits. Also, the presence of market power results in a divergence of both abatement and technology adoption levels with respect to the benchmark scenario of perfect competition, as long as technology adoption becomes more effective in reducing abatement costs.

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Energy Specializations: Energy and the Environment – Environmental Market Design; Energy and the Environment – Carbon Capture and Sequestration

JEL Codes: Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects, Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, L13: Oligopoly and Other Imperfect Markets, D42: Market Structure, Pricing, and Design: Monopoly, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis, D43: Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection

Keywords: Environmental policy, emission permits, market power, environmentally-friendly technologies

DOI: 10.5547/01956574.39.SI1.fand

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Published in Volume 39, Special Issue 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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