Potential anti-competitive effects of emission permit markets – A survey on theoretical findings and evidence

Emissions trading has been established as an important instrument of pollution control in many world regions. However concerns have been raised whether or not emission-trading schemes may distort competition either on the permit market itself or on related output markets. In this paper we review tradable emission-allowance schemes with special reference to anti-competitive effects. Such distortions may be caused by large firms exercising market power on the allowance market by holding down supply or suppressing demand in order to manipulate prices to their advantage. Firms may also try to abuse the allowance market to put other firms, with whom they compete on the output market, at a competitive disadvantage. Further distortions and abuses may be caused by special or ill-defined rules on the allowance market or other markets. In this paper we survey theoretical insights on potential anti-competitive effects of emissions trading and also provide some empirical evidence for market power abuses on auctioned and grandfathered allowance markets with a particular focus on the (alleged) allowance market abuse by power utilities in Germany and California.