Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
● ‘cost-minimising’ (profit maximising) manipulations, which implies the ability
to influence the transaction price of traded permits. A monopolistic seller sets
the price at the level which maximises the difference between revenues from
permits sales and its abatement costs. Similarly a monopolistic buyer
manipulates the price in order to minimise the sum of expenditures from
permits purchases and its abatement costs.
In most cases, exclusionary manipulation is not a feasible strategy. In most
markets for emissions trading, participants come from a very wide range of
economic activities. This means that a new entrant into a given sector can obtain
tradable permits from firms outside its own sector, which have no incentives to
withhold the permits from the new entrant. 225 In practice therefore, an
exclusionary manipulation strategy will be difficult to pursue. 226
However, the cost-minimising manipulation strategy could arise if either
dominant buyers or dominant sellers could exercise their market power and thus
alter prices. For instance, a dominant seller may set a high price and sell fewer
permits than under competitive conditions. 227 In such a case emissions trading
will not deliver the economic efficiencies expected, since the permit price would
reflect market power and not the cost of pollution abatement. Firms would
therefore be induced to undertake emission reduction strategies that are not cost
effective. Hahn (1984) and Weskog (1996) predict that a dominant seller, or a
coalition of them, would withhold supply from the market, resulting in smaller
aggregate cost savings than if the market had been competitive. 228
However, Carlén (2003) in an experimental analysis focusing on the end of the
emissions trading period, shows that in a dual auction market, where a
dominant trader faces an opposite side of the market that is fairly competitive,
the presence of a dominant trader does not affect market efficiency. 229
A possible way to prevent the exercise of market power is to extend the size of
the trading market. The greater the trading market, the lower the problems of
concentration. This can be achieved by extending trading on an international
basis, perhaps with aggregate caps at an industry level. 230 Burniaux (1999) and
Bader (1996), following Hahn (1984), find that international-level trading would
greatly minimise the risk of market power. 231
225 See Baron (2000)
226 Westkog (1996) shows that an exclusionary manipulation may be unlikely even in the case that governments and
not firms where the main traders, since conflicting interests by different firms within a country would make
difficult for countries to arrive to an effective exclusionary manipulation. Westkog H. (1996) ‘ Market Power in a
System of Tradable CO Quotas’. The Energy Journal, Vol. 17, No 3.
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227 In the same way a monopsonistic firm may set the permit price lower compared with the competitive scenario
and abate too much (buy too few permits) relative to the competitive case.
228 Hahn R.W.(1984), ‘ Market Power and Transferable Property Rights’, Quarterly Journal of Economics 99, pp 753-65.
229 Carlén B, ‘ Market Power in International Carbon Emissions Trading: A Laboratory Test. Global Change, MIT
Report No. 96, January 2003.
230 ABARE (1995) Global Climate Change: Economic Dimension of a Cooperative International Policy Response
beyond 2000, ABARE, Canberra.
231 Bader P. (1996): Emissions trading; country-model vs. industry-model’. Chair of Economics, University of
Augsburg, Germany.
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