CO2 trade and market power in the EU electricity sector

The EU commission is planning to launch an emission trading market for greenhouse gases within near future. This to meet its obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol. After a theoretical discussion on market power in such a market, we turn to the empirical evidence which suggests that a reasonable number of sources of CO2 emissions in the power sector exists for boilers larger than 25MW. Overall, together with the contestable single market for electricity, the risk of significant strategic behaviour seems negligible. Thus, the electric utility sector seems a suitable testing ground for an EU-scheme of emissions trading. In the longer run, it will be important to broaden the scope of the trading scheme as the inclusion of other sectors will further limit the risk of market power.