Pollution Permits, Imperfect Competition and Abatement Technologies

Abstract

Under imperfect competition, the effect of a cap-and-trade system on industry profits depends on the type of abatement technology that is used by firms: industries that use process-integrated technologies are more affected than those using end-of-pipe abatement technologies. The interaction between environmental policy and the evolution of the market structure is then studied. In particular, a reserve of pollution permits for new entrants is justified when the industry uses a process-integrated abatement technology, while a system with a preemption right may be justified in the case of end-of-pipe abatement technology.

Keywords: Cap-and-trade system, imperfect competition, abatement technologies

JEL Classification: L13, Q53, Q58