Empirical Research On Market Power, Transaction Cost And The Efficiency Of Carbon Market

As a market-based quantity instrument for emissions control, emissions trading scheme(ETS) has become a matter of concern since the explicit aggregate emissions cap could be achieved in a cost-effective manner. Pilot emissions trading schemes have been initiated in some areas in China, and the central government has begun to formulate the policies related to a unified carbon market. In reality, market power accrued to the traders and transaction cost has been two major factors related to the efficiency of the scheme. A series of topics surrounding those should be studied and discussed from the view of theory and empirical study, in order to provide the theoretical support to the mechanism design of the ETS. This paper has compared the relevant international experiences and figured out the problems in pilot ETSs in China recently, and then studied the influence from market power and transaction cost respectively on the cost-effectiveness, environmental effectiveness, the diffusion of the emission reduction technologies and the determination of the reasonable sectoral coverage of the ETS. Finally we have offered several proposals to the design of the unified carbon market in China. The main findings and conclusions are as follows:(1) We firstly choose the 1867 industrial firms participating in “enterprise energy-saving low carbon action” in pilot regions in China, and then estimated the firm-level abatement cost curves to construct “Industrial firm abatement cost database”. Based on the sample firms, we have used a cost-benefit analysis to investigate the impact of the transaction cost i.e. trading fees and monitoring, reporting and verification(MRV) cost on the cost-effectiveness of the pilot ETSs in China. We have found that: a) recently fixed MRV cost has more obvious impact on the cost-effectiveness of the ETS rather than trading fees; b) the difference in the impact across the regions could relate to the number of the firms, the distribution of emissions among the firms, and their share in the regional emissions; c) this impact from the transaction cost remains notable even if the regional ETSs are linked or the emissions reduction targets are improved; d) if the MRV cost could be reduced or the emissions reduction target could be improved, more firms could be cost-effective in the ETS.(2) The market power accrued to firms could also impose certain influence on the cost-effectiveness of the ETS. We have also chosen the firms in the “Industrial firm abatement cost database” as the sample, then applied Hahn-Westskog model and used allowance trading volume as indicator to identify the market structure in each pilot ETS. We have found: a)the influence from the market power accrued to the firms appeared to be distinct in each ETS, where the more notable impact come from the monopoly structure, duopoly structure and the collusion behaviors; b) the impact has also been still significant even when the linkage of the ETS; c) the improvement of emissions reduction target could also not improve the market efficiency; d) the ability to distort the allowance price of the firms has been related to various factors such as market structure, the trading volume, emissions reduction potential and so on;(3) As Full Market Model has advantage in the identification of the strategic agents, we have adopted this model and the sample firms in the “Industrial firm abatement cost database” to distinguish the strategic firms in the pilot ETSs in China. We have also studied the characteristics of the firms and the impact from their strategic behaviors on the cost-effectiveness of the scheme; in this process, we have chosen the possible factors related to the market power such as the impact on the allowance price from the single firm’s behavior, and its trading volume, emissions or reduction potentials and compared the impact on the model results respectively, so the strategic firms have been identified in each pilot region. We have found that a) the impact on the allowance price from the single firm’s behavior could be chosen as the suitable figure to distinguish its market power; b) the number of strategic firms lies on the character of the market structure, which also relates to the impact on the total compliant cost and allowance trading volume, while the impact on the allowance price come from the comparison between the strategic power between buyers and sellers; c) the major strategic buyers come from the steel and power sectors while the major strategic seller come from the non-metal products and mining sector; d) The strategic sellers or buyers with the relatively stronger market power tend to collude and the impact from the collusive behaviors appeared more significant.(4) One of the important purposes for the emissions trading is to accelerate the adaptation and diffusion of the emissions reduction technologies. We have built the technology adaptation date model considering the difference in the production capacity of the firms, and study the strategic behaviors of the firms in both product market and allowance market and their impact the on diffusion of the emissions reduction technologies; in this process, we adopt the technology-based micro-level abatement cost curves of China’s iron and steel sector to give the empirical research, from which we have found that: a) The technology adaptation date among the firms relates to the increase in the benefits per unit of production capacity; b) the market structure or the monopoly degree of the emissions trading could give impact on the diffusion speed of the technology through the whole industry. The firms adopting earlier formerly could adopt in advance to achieve more excess benefits in light of the strategic power, and the distortion of the product market and allowance market have been relieved and social welfare could be improved as more firms adopt the technology. However, if the monopoly degree of the allowance sellers could be relatively higher especially there is some single big seller, the firm could delay the adoption date, and the social welfare could decline.(5) It is crucial to determine an adequate sectoral coverage in the design of ETS. The Chinese government should pay more attention to the issue as there is a huge diversity in regional economic development in China. We have used the Nash-Cournot model to analyze the influence of strategic partitioning of allowances based on the analysis of compliance cost in different sectoral coverage schemes in the unified carbon market. We have found that: a) the strategic partitioning of reduction requirements between trading and non-trading sectors has little impact on allowance prices and compliance cost, despite this western regions in China are likely to receive more benefit than those in the east though the gains are limited; b) when industrial sectors are successively included in the ETS, allowance prices range from 40–50 RMB/tonne, and this approaches that in the ideal scenario in which all sectors are included;(c) the following sectors could be included in a reasonable sectoral coverage of a downstream ETS in China: mining, paper and printing, processing of petroleum, coking, processing of nuclear fuel, chemical products, metals and non-metal products, and production and supply of electric power and gas.