The design of a tradeable CO2-quota system under market imperfections

Abstract

Market power within a system of tradeable CO2-quotas leads to a non-optimal distribution of abatement across countries. In this paper we introduce a quota system that may reduce the adverse effects of market power, and thereby result in a distribution of abatement across countries that is closer to a cost-effective outcome. However, this system leads to a non-optimal distribution of abatement across periods. Hence, we face a trade-off between a cost-effective distribution of abatement across periods and reduced adverse effects of market power.