Incentives for Strategic Behavior in the Permit Market

Abstract

In an international permit trading regime, the initial allocation of permits across countries determines the participating countries' trading position. Large permit trading countries on both sides of the market can exploit their market power in the permit market. We analyze how the competitive environment on the permit market affects countries' gain from strategic manipulation of the permit price. We conclude that gains from strategic behavior depend on whether there are other strategic players on the same or opposite side of the market. * The author would like to thank Mads Greaker, Matti Liski, Knut Einar Rosendahl and two anonymous referees for their helpful comments and valuable suggestions.