On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards

de Vries, Frans P.; Dijkstra, Bouwe R.; McGinty, Matthew

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. © 2013 Springer Science+Business Media Dordrecht.

Citation

de Vries, F. P., Dijkstra, B. R., & McGinty, M. (2014). On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards. Environmental and Resource Economics, 58(4), 665-682. https://doi.org/10.1007/s10640-013-9715-2

• Journal Article Type: Article
• Acceptance Date: Aug 9, 2013
• Online Publication Date: Aug 30, 2013
• Publication Date: 2014-08
• Deposit Date: Dec 18, 2017
• Publicly Available Date: Dec 18, 2017
• Journal: Environmental and Resource Economics
• Print ISSN: 0924-6460
• Electronic ISSN: 1573-1502
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 58
• Issue: 4
• Pages: 665-682
• DOI: https://doi.org/10.1007/s10640-013-9715-2
• Keywords: Cap-and-trade; Emissions trading; Imperfect competition; Industrial change; Intensity standards; Pollution control
• Public URL: https://nottingham-repository.worktribe.com/output/733565
• Publisher URL: https://link.springer.com/article/10.1007/s10640-013-9715-2
• 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