A Note on Market Power in an Emission Permits Market with Banking

Abstract

In this paper, we investigate the effect of market power on the equilibrium path of an emission permits market in which firms can bank current permits for use in later periods. In particular, we study the market equilibrium for a large (potentially dominant) firm and a competitive fringe with rational expectations. Rather than providing a full description of the equilibrium solution for all combinations of permits allocations and cost structures, we provide a characterization of the equilibrium solution for a few illustrative cases. For example, we find that if the large firm enjoys a dominant position in the after-banking market, it can always extend this dominant position to the market during the banking period regardless of the allocation of the stock (bank) of permits.