Market Power, Intertemporal Permits Trading, and Economic Efficiency

The banking and borrowing (BB) system has been developed gradually in the tradable permits market to perform a role as an environmental management tool. One question naturally arises as to how it will impact the behaviors of firms and the efficiency in presence of market power in the permits market. This paper considers market power in two cases: with and without the BB system. The equilibrium behaviors of the firms are identified in two cases. The findings show that the producing and discharging behaviors of firms depend on the permits price elasticity of output price without BB system, while they only depend on the growth rate of the output price in the BB system. Although both cases fail to obtain efficient solutions, the market with a BB system is capable of alleviating the inefficiency arising from market power compared with that without a BB system. The path of permits price satisfies the Hotelling rule in the case of the BB system, while it is closely related to the path of output price and output price elasticity of permits price in the case without the BB system.

The Social Cost of Sub-Soil Resource Use

This paper presents a market-price-based method to value sub-soil resources in environmental Cost-Benefit Analysis and Life Cycle Assessment. The market price incorporates the privileged information of the market agents, explicitly or implicitly anticipating future applications of the resource, future backstop technologies, recycling potentials, the evolution of reserves and extraction costs. The market price is therefore considered as the best available integrated information reflecting the actual values of these parameters. Our method is based on the Hotelling rule and the fact that private agents discount future costs and benefits at a higher rate than society as a whole. In practice, the price of the last resource unit sold is calculated with the Hotelling rule using a market discount rate. Then, the price at depletion is retropolated with a social discount rate smaller than the market discount rate. The resulting corrected “socially optimal” price is higher than the market price. The method allows to calculate the social cost of resource exhaustion, which is applicable in Cost-Benefit Analysis and Life Cycle Assessment. The method is applied to mineral and fossil resources and the results are compared with other recent methods that seek to place a monetary value on resource depletion.