Heterogeneous National Allocation Plans in the EU Emission Trading Scheme under Imperfectly Competitive Markets

This paper extends a model by Ehrhart et al (2008) which examines duopoly under the EU Emission Trading Scheme, analyzing the effectof emissions permit price changes on firm profits. While their model assumes no initial allocation of permits to firms, the extension presented here incorporates heterogeneity in national allocation plans of pollution permits into the analysis. We find that, unlike Ehrhart et al, there are certain circumstances where a permit price increase will unambiguously lead to a rise in profit due to the initial allocation of permits. Because national allocation plans differ across member nations in the EU, these differing allocations have the potential to advantage some firms in the EU if they receive more permits than other firms. In addition, while Ehrhart et al (2008) state that at some point there may be an incentive to lobby for a lower allocation of permits, in this extension we find that while that incentive may exist, there also may be an incentive to lobby for more permits.