Tradable quota taxation and market power

We investigate how corrective taxation can improve the efficiency properties of tradable quota systems affected by market power. Indeed, we show that, when there is a dominant firm in the tradable quota market, the regulator can set an ad hoc taxation on firms' traded quotas that restores cost...

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Bibliographic Details
Published in:Energy economics 2017-03, Vol.63, p.248-252
Main Authors: D’Amato, Alessio, Valentini, Edilio, Zoli, Mariangela
Format: Article
Language:English
Subjects:
Compliance
Cost analysis
Cost effectiveness
Cost engineering
Economic models
Energy economics
Implementation
Market power
Marketing
Markets
Power
Power efficiency
Property taxes
Quotas
Tax revenues
Taxation
Tradable quota markets
Tradable quota taxation
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Summary:We investigate how corrective taxation can improve the efficiency properties of tradable quota systems affected by market power. Indeed, we show that, when there is a dominant firm in the tradable quota market, the regulator can set an ad hoc taxation on firms' traded quotas that restores cost effectiveness without driving the dominant firm's net demand to zero. Achieving cost effectiveness with market power and quota taxation implies some costs in terms of tax revenue that, however, can be justified by the corresponding reduction of compliance costs. Moreover, we see that there may be cases where all firms result to be better off after the implementation of corrective taxation. •We focus on a tradable quota market featuring a dominant firm that can exert market power.•We propose a corrective taxation scheme that can restore the cost effectiveness property of tradable quotas.•Achieving cost effectiveness with market power and quota taxation implies some costs in terms of tax revenue.•We identify a case where all firms result to be better off after the implementation of corrective taxation.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2017.01.024