Market shares and dominant market positions in the case of emissions trading

Emissions trading is acquiring increasing importance in practice. To date, emission rights have almost always been allocated free of charge. This, in turn, has resulted in a discussion about the potential of a dominant market position of individual market participants. In this context, existing literature either simply assumes that such a position exists and analyses the implication or determines market shares based on entitlements allocated to individual players. With regard to the second line of literature, we argue that this approach is not satisfactory and propose an approach based on 1) initial allocation together with 2) marginal abatement costs curves and 3) business-as-usual emissions. Together with a given market price, these three factors allow a determination of market shares. Based on competition rules in the U.S., the EU, and Japan, we discuss relevant market shares that may provide the floor for a dominant market position. Applied to the international climate regime, we conclude that certain allocation rules which may be perceived as “fair” may imply possible dominant market positions for Parties that would have to reduce their emissions considerably.

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