Analysis of the Effect of the Initial Emission Permits Allocation on Market Power

This paper offers an analytical model of emission permit markets in which a large number of regulated emitter participate, and derives formulae that shows the entire dependence of the emergence of market power on the permit initial distribution as well as the existence of a threshold for effective market power. Furthermore, the model we 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.