Game Practice and the Environment

Game Practice and the Environment

The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development

Edited by Carlo Carraro and Vito Fragnelli

This book summarises the latest achievements of researchers involved in the application of game theory to the analysis of environmental matters. It provides an overview of different methods and applications, and gives the reader new insights on the solutions to complex environmental problems. The authors investigate various game theoretic approaches, including cooperative and non-cooperative game theory, and analyse both dynamic and static games. They illustrate the application of these approaches to global and local environmental problems, and present novel but effective tools to support environmental policy making. In particular, they focus on three important issues; climate negotiations and policy, the sharing of environmental costs, and environmental management and pollution control.

Chapter 10: Greenhouse Gases, Quota Exchange and Oligopolistic Competition

Sjur Didrik Flåm and Odd Godal

Subjects: economics and finance, environmental economics, game theory, environment, environmental economics


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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