Environmental and Resource Economics

, Volume 58, Issue 4, pp 665–682 | Cite as

On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards

  • Frans P. de Vries
  • Bouwe R. Dijkstra
  • Matthew McGinty
Article

Abstract

This paper examines the interdependence between imperfect competition and emissions trading. We particularly analyze the long run equilibrium in a two-sector (‘clean’ and ‘dirty’) model with Cournot competition among firms who face a fixed cost of production. The clean sector is defined as the sector with the highest long run cost margin on emissions. We compare the welfare implications of a cap-and-trade scheme with an emissions trading scheme based on relative intensity standards. It is shown that a firm’s long run equilibrium output in the clean or dirty sector does not depend on the emissions trading format, but only depends on the fixed cost of producing in the respective sector. Intensity standards can result in clean firms selling allowances to dirty firms, or dirty firms selling to clean firms. The former outcome yields higher welfare. It is demonstrated that cap-and-trade outperforms the intensity-based trading scheme in terms of long run welfare with free entry and exit. With intensity standards the size of the clean sector is too large.

Keywords

Cap-and-trade Emissions trading Imperfect competition Industrial change Intensity standards Pollution control 

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Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  • Frans P. de Vries
    • 1
  • Bouwe R. Dijkstra
    • 2
  • Matthew McGinty
    • 3
  1. 1. Division of Economics, Stirling Management SchoolUniversity of StirlingStirlingUK
  2. 2.School of EconomicsUniversity of NottinghamNottinghamUK
  3. 3.Department of EconomicsUniversity of Wisconsin-MilwaukeeMilwaukeeUSA

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