Optimal allocation of tradable emission permits under upstream-downstream strategic interaction

Joana Resende (1, 2) , Maria Eugénia Sanin (1, 3)

1 CORE - Center of Operation Research and Econometrics [Louvain]
2 CETE
3 X-DEP-ECO - Département d'Économie de l'École Polytechnique

In this paper we account for the fact that Cournot equilibrium strategies in the sector under environmental regulation depend on firms'interaction in the permits market (and vice versa). In this context, we show that the cost-effective allocation of permits between firms must compensate the cost-rising strategies exercised by the stronger firm (in the output market). Then, taking into account the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability that serves as an indicator for the de- gree of price competition. The simulation allows us to determine how output market characteristics affect differently optimal permit allocation depending on the regulator's objective.

Domaines: Economies et finances

Joana Resende, Maria Eugénia Sanin. Optimal allocation of tradable emission permits under upstream-downstream strategic interaction. 2009. ⟨hal-00437645⟩