Market design in tradable emissions permits markets

Sanin Vazquez, Maria Eugenia
(2009)

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Authors
  • Sanin Vazquez, Maria EugeniaUCLouvain
    author
Supervisors
Bréchet, Thierry
 ;
Cantillon, Estelle
Abstract
(en) Firms producing a polluting good that is subject to environmental regulation with tradable emissions permits base their production, pollution abatement and permit trading decisions on their expectations about permit prices and goods' market conditions. Firms can only rely on their permit price expectations for decision-making when the market for tradable permits is stable (i.e. low volatility) and is characterized by a transparent and efficient price-formation mechanism. In the first part of this thesis we assess the determinants of short-run price dynamics and market stability, as well as the market microstructure of tradable permits markets as a function of (and in relation to) the underlying goods market. The latter analysis is undertaken in chapter 2 using transactions data for the U.S. Acid Rain market over the period 1995-2005, cross-referenced with regional electricity markets conditions over the same period. The determinants of short-run price dynamics and market stability are analyzed in chapter 3: using the December 2008 future prices registered in the EU emission trading scheme over the period 2005-2007, we find that the release of information regarding the pollution constraints imposed by the EU Commission undermines market stability. In the second part of this thesis we complete the assessment of tradable permits markets by studying production, abatement and trading decisions themselves. To this end, we adapt the traditional successive market theory to account for the specific characteristics of the technological linkage between the permits market (upstream) and an oligopolistic goods market (downstream). In this context we show how strategic firms are able to manipulate the permit price and price path, as well as which market design should be implemented by the regulator to preserve efficiency and increase total welfare.
Affiliations
  • Institution iconUCLouvainECGE - Sciences économiques et de gestion

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Sanin Vazquez, M. E. (2009). Market design in tradable emissions permits markets. https://hdl.handle.net/2078.5/40602