Impacts of ETS allocation rules on abatement investment and market structure

Abstract

We examine the influence of carbon permit allocation rules on market structure in a Cournot duopoly market. This study demonstrates that the benchmark allocation rule is more efficient than grandparenting in terms of abatement investment and market output. Introduction of the emission trading scheme affects market structure towards higher market concentration, regardless of the allocation rule, and benchmarking tends to make the market more concentrated, as larger firms have more efficient abatement technology. Our analytical findings support the point that the benchmark allocation rule should be widely adopted from the perspective of improving the efficiency of greenhouse gas reduction. At the same time, we have also raised a concern that the market structure will move in an unfavorable direction towards to smaller firms. © 2021