Report on market concentration and transferable quotas

The ENTRACTE research project is aiming to analyse the European climate policy portfolio with special emphasis on the role of interactions between its different parts. The project’s ultimate goal is to provide pragmatic guidance to policy makers for designing effective, cost efficient and politically and legally feasible climate policy portfolios.

This report describes the impact of market power on the functioning of allowance markets. Market power can weaken the link between permit prices and abatement choices as it introduces incentives for the strategic manipulation of allowance availabilities. Polluting firms with market power seek to gain advantageous control of the goods market at the expense of their rivals and consumers. These results are discussed in relation to the current state of knowledge about the functioning of the EU ETS and a set of hypothesis is provided that can be used to test for the impacts of market power on the functioning of the EU ETS.

Author: Samuel J. Okullo