Emission Permits and Competition

Tradeable emission permits are considered an efficient instrument for achieving a given emission target at lowest possible economic cost. Tradeable permit schemes, also called cap and trade schemes, have become major pollution control instruments. They have been implemented at a national level and, as in the European Union, at supra-national level. The main idea behind emission permits is to create a system of property rights for pollution. This is achieved by setting a cap on total emissions and allocating the corresponding amount of emission permits to companies. Experiences with emission trading systems have been largely positive. Nevertheless, various market imperfections may distort permit markets. Anti-competitive effects may arise through large firms exercising their market power in the permit market, or firms abusing permit trading systems to create distortions on the output markets. In addition, unequal conditions across jurisdictions may distort competition.