Group for Research in Decision Analysis

Oligopolistic Markets for Tradable Carbon Emission Permits with Transaction Costs

Alain Haurie Director and co-founder, ORDECSYS, Switzerland

This paper proposes a computable dynamic game model of the strategic competition between Russia and developing countries (DCs), mainly represented by China, on the international market of emission permits created by the Kyoto protocol. The model uses a formulation of a demand function for permits from Annex-B countries and of marginal abatement costs (MAC) in Russia and China provided by two detailed models. GEMINI-E3 is a computable general equilibrium model that provides the data to estimate Annex-B demand for permits and POLES is a partial equilibrium model that is used to obtain MAC curves for the two active players. The competitive scenario is compared with a monopoly situation where only Russia is allowed to play strategically. The impact of allowing DCs to intervene on the international emission trading market is thus assessed.