Inderscience Publishers

Designing emissions trading programs in Canada: the implications of market power on economic and environmental outcomes

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Environmental policy often assumes that firms will participate in a competitive emissions trading market to cost-effectively achieve their emission reduction constraint. Indeed, the competitive market assumption is central to the notion that emission trading is the least-cost management option to achieve an environmental objective. This paper uses two optimisation models based on marginal abatement cost functions to investigate how market power distortions within an emission trading system can impact overall compliance costs and environmental performance. One model is based on the solvent degreasing sector in Canada and the other is for the Parties to the Kyoto Protocol. The analysis indicates that the presence of market power can result in a sub-optimal economic outcome while improving environmental performance. Given this result, policy makers should consider the implications of market power when designing emissions trading programmes. This is particularly the case if a few firms control a large share of the overall emission reduction target.

Keywords: emissions trading, environmental regulations and policy, Kyoto Protocol, toxic substances control

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