EPRG 0510

David Newbery

Climate Change Policy and its Effect on Market Power in the Gas Market

EPRG 0510  | Non-Technical Summary | PDF

Abstract: The European Emissions Trading Scheme (ETS) limits CO2 emissions from covered sectors, especially electricity until December 2007, after which a new set of Allowances will be issued. The paper demonstrates that the impact of controlling the quantity rather than the price of carbon is to reduce the elasticity of demand for gas, amplifying the market power of gas suppliers, and also amplifying the impact of gas price increases on the price of electricity. A rough estimate using just British data suggests that this could increase gas market power by 50%.

Keywords: Climate change, emissions trading, market power, gas, quotas vs taxes

Also published in:

  • Newbery, D.M. (2008) “Climate change policy and its effect on market power in the gas market”, Journal of European Economic Association, June 6(4), 727-51

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