The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development
Edited by Carlo Carraro and Vito Fragnelli
Chapter 10: Greenhouse Gases, Quota Exchange and Oligopolistic Competition
Sjur Didrik Flåm and Odd Godal 1. THE BACKGROUND AND THE PROBLEM Global warming now appears a menace – enhanced by anthropogenic emissions of greenhouse gases. Regulating these emissions has therefore gained notable priority in policy-making circles. Some regulation proceeds by voluntary quota transfers or trades. And quite naturally, since Montgomery (1972) ﬁrst proved that such trade may foster cost-eﬃciency, market-based mechanisms have attracted much attention.1 In that setting agents are bestowed with emission permits and allowed to engage in subsequent exchange. Clearly, the permits – or licences to pollute – can be construed as production factors. As such they are likely to aﬀect diverse forms of competition, including the imperfect ones. So, we state the following: Problem: Suppose here that emission quotas serve as inputs in oligopolistic competition. Then, how can quotas be shared in the ‘emissions market’? And how can the agents reach an overall equilibrium in the product market? To come to grips with these questions we shall – for realism and applicability – presume coexistence of strategic and non-strategic behaviour. To wit, on the production side some agents – maybe all – are taken to be full-ﬂedged Cournot oligopolists, perfectly foreseeing how own supply will aﬀect market prices. Similarly, on the factor side – in the quota market – traders need not all come forward as price-takers. Admittedly, if somebody behaves strategically in merely one direction, then his split nature – resembling that of Dr Jekyll and Mr Hyde – stands to be criticized for lack of consistency or charm. Be that...
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