Carbon market is established to achieve CO2 emission reduction targets cost efficiently. However, the existence of market power usually has negative impacts on the cost-effectiveness of the carbon market. As market power-induced efficiency loss depends on permit allocation, the choice of permit allocation methods is likely to affect the cost-effectiveness of the carbon market. This paper theoretically examines the effect which yields some policy recommendations on how to choose a CO2 emission permit allocation method for different industries. We first construct theoretical leader-follower model in the carbon market to show how the choice of emission permit allocation method affects the cost-effectiveness of an ETS when market power exists. Meanwhile, we analyze the effect of emission permit allocation method on CO2 cost pass-through for fairness consideration. The model results show that proper choice of emission permit allocation method can help reduce the efficiency loss. Under grandfathering and benchmarking rules, the carbon market would be more efficient if the permits initially allocated to the dominant firm were closer to its CO2 emissions. Under the auctioning rule, the dominant firm tends to lower the CO2 price, which may result in efficiency loss. We also find that the CO2 emission permit allocation method affects the CO2 cost pass-through and the fairness of ETS. Although receiving free allocation of CO2 emission permits under the grandfathering rule, firms still pass all the CO2 cost through to downstream consumers, resulting in windfall profits. Under the benchmarking rule, firms just pass a small portion of the CO2 cost. Under the auctioning rule, firms buy the CO2 emission permits themselves and pass on all the CO2 cost. Based on these findings, we suggest that different emission permit allocation methods may be used in different industries. Firms in the power sector are likely to have the market power to determine the CO2 price in the carbon market and the CO2 cost pass-through potential in the product market. Thus, the benchmarking rule may be used for the power sector. Firms in energy-intensive industry have high CO2 costs and would pass most CO2 costs through to downstream consumers. Therefore, benchmarking is recommended for energy-intensive industry in a new carbon market and auctioning is suggested in a mature carbon market. As firms in the domestic sector have diverse products in the product market, auctioning is the best choice for the domestic sector. Since CO2 costs in the domestic sector are relatively low, grandfathering could be the second choice for the sector.

中文翻译：

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市场支配力下许可证分配对限额与交易制度绩效的影响

建立碳市场，以经济高效地实现二氧化碳减排目标。然而，市场力量的存在通常会对碳市场的成本效益产生负面影响。由于市场力量引起的效率损失取决于许可分配，因此许可分配方式的选择很可能会影响碳市场的成本效益。本文从理论上考察了这种影响，从而为如何选择不同行业的 CO2 排放许可分配方法提供了一些政策建议。我们首先构建了碳市场中的理论领导者-跟随者模型，以展示当市场力量存在时，排放许可分配方法的选择如何影响 ETS 的成本效益。同时，出于公平考虑，我们分析了排放许可分配方式对 CO2 成本转嫁的影响。模型结果表明，合理选择排污许可分配方式有助于减少效率损失。根据祖父和基准规则，如果最初分配给占主导地位的公司的许可更接近其二氧化碳排放量，碳市场将更有效率。在拍卖规则下，占主导地位的企业往往会降低 CO2 的价格，这可能会导致效率损失。我们还发现，CO2 排放许可分配方式会影响 CO2 成本转嫁和 ETS 的公平性。尽管在祖父规则下获得免费分配的 CO2 排放许可，但企业仍将所有 CO2 成本转嫁给下游消费者，从而产生意外利润。根据标杆规则，公司只是转嫁了二氧化碳成本的一小部分。在拍卖规则下，企业自己购买二氧化碳排放许可证并转嫁所有的二氧化碳成本。基于这些发现，我们建议不同行业可采用不同的排污许可证分配方法。电力行业的企业可能拥有决定碳市场中二氧化碳价格和产品市场中二氧化碳成本转嫁潜力的市场力量。因此，对标规则可用于电力部门。能源密集型行业的公司二氧化碳成本很高，并将大部分二氧化碳成本转嫁给下游消费者。因此，新的碳市场建议对高耗能行业进行对标，成熟的碳市场建议拍卖。由于国内部门的公司在产品市场上拥有多样化的产品，拍卖是国内部门的最佳选择。由于国内部门的二氧化碳成本相对较低，祖父法可能是该部门的第二选择。