SER, January 27
“Conditions for profit-neutral permit allocations”.
Jean-‐Philippe Nicolaï (ETH Zurich)
Abstract :
This paper shows that when a regulator implements a market for permits, the number of free allowances ordinarily required to neutralize profits is low. More precisely, the impacts of three parameters are discussed: market structure, demand elasticity and the cap for emissions. This is shown in a model where firms compete "à la Cournot" and the demand function is iso-‐elastic.
Firms use polluting technologies. The regulator implements a market for permits in order to reduce emissions. The paper determines the profit-‐neutral allocations and shows that few allowances are required. Moreover, it determines the level of reductions that a regulator could implement while it offsets profits' losses. The paper shows that in the cases of either a monopoly or a duopoly with high reductions, the regulator cannot offset the firms' losses. The model is calibrated for the two first phases of the EU-‐ETS. The percentage of permits which would have offset profits' losses for the first phase of EU-‐ETS is of 11%.
