Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power

Stemming from politically given market imperfections in a tradeable permits system, we develop a Stackelberg game model to describe how a large agent may exercise market power at the expense of a competitive fringe. In a dynamic framework with banking and borrowing, we explore how to restore the market equilibrium with an optimal allocation of permits. Overall, these results yield a better understanding of market mechanisms - and their potential for failure - to deliver CO2 emissions reductions needded to fight against climate change, and may be of interest for a wider audience composed of academic researchers and policy makers in the climate change policy arena.