Emissions trading has been established as an important instrument of pollution
control in many world regions. However concerns have been raised whether or not
emission-trading schemes may distort competition either on the permit market itself
or on related output markets. In this paper we review tradable emission-allowance
schemes with special reference to anti-competitive effects. Such distortions may be
caused by large firms exercising market power on the allowance market by holding
down supply or suppressing demand in order to manipulate prices to their advantage.
Firms may also try to abuse the allowance market to put other firms, with whom they
compete on the output market, at a competitive disadvantage. Further distortions and
abuses may be caused by special or ill-defined rules on the allowance market or other
markets. In this paper we survey theoretical insights on potential anti-comptitive
effects of emissions trading and also provide some empirical evidence for market
power abuses on auctioned and grandfathered allowance markets with a particular
focus on the (alleged) allowance market abuse by power utilities in Germany and
California.
