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

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

Authors

Frans P. de Vries f.p.devries@stir.ac.uk

Matthew McGinty mmcginty@uwm.edu



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 http://eprints.nottingham.ac.uk/id/eprint/48766
Publisher URL https://link.springer.com/article/10.1007/s10640-013-9715-2
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf
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

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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