Study on the Emergence of Market Power in Emission Right Markets

When a market participant who initially holds a large proportion of available permits in an emission permit market would be expected to behave as a monopolist. This paper offers an analytical model of emission permit markets in with a large number of regulated emitter participate, and derives formulae that estimate the degree of market distortion. It shows the entire dependence of the ratio of market prices to competitive levels on the permit initial distribution as well as the existence of a threshold for effective market power. Furthermore, the model I derived yields formulae that estimate how much permit prices in such distorted markets depart from competitive levels. These findings not only show the significance of initial emission permits but also are available for emission trading of our country.