Strategic Behavior and the Environment > Vol 3 > Issue 3

Incentives for Strategic Behavior in the Permit Market

Cathrine Hagem, Research Department, Statistics Norway, Norway,
Suggested Citation
Cathrine Hagem (2013), "Incentives for Strategic Behavior in the Permit Market", Strategic Behavior and the Environment: Vol. 3: No. 3, pp 149-167.

Publication Date: 16 Mar 2013
© 2013 C. Hagem
Climate Change,  Market-based Policy Instruments,  Environmental Economics,  Industrial Organization
Emissions permitsStrategic permit tradingClimate agreementsMarket power


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In this article:
The Model 
Results From the Literature 
Incentives for Strategic Behavior 
Numerical Example 
Concluding Remarks 
Appendix A 
Appendix B 
Appendix C 


In an international permit trading regime, the initial allocation of permits across countries determines the participating countries' trading position. Large permit trading countries on both sides of the market can exploit their market power in the permit market. We analyze how the competitive environment on the permit market affects countries' gain from strategic manipulation of the permit price. We conclude that gains from strategic behavior depend on whether there are other strategic players on the same or opposite side of the market.