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Aparna Sawhney and Susmita Mitra
''Examining tradeable permits with market power, banking and non-compliance: a finite period model''
( 2011, Vol. 31 No.2 )
Our model examines how co-existence of market power and noncompliance affects the efficiency and effectiveness of a cap-and-trade system with banking-borrowing in a finite period model. The dynamic equilibrium analysis here extends the results of the established literature, and we show that the initial allocation of permits to the dominant firm continues to play a significant role in both the cost-efficiency of abatement, as well as effectiveness of the cap-and-trade system. The presence of cheating, however, makes the permit demand of firms more price-elastic compared to a model with no cheating. Moreover, the second-order price sensitivity of the permit demand of the dominant firm plays a critical role in the compliance behavior of the dominant firm. We analyze the relationship between violation of a fringe firm and the dominant firm, illustrating the asymmetrical implications for when the dominant firm is a buyer of permits versus a seller of permits. Since we expect the regulator to reduce initial permit allocations over time, we also examine its impact on non-compliance behavior of the dominant firm.
Keywords: Market power, price distortion, cap-and-trade emissions program, abatement efficiency, non-compliance
JEL: Q5 - Environmental Economics: General
D4 - Market Structure and Pricing: General
Manuscript Received : Nov 01 2010 Manuscript Accepted : Apr 24 2011

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