This paper studies merger incentives for polluting Cournot firms under a competitive tradable emission permits market. We find that when firms are symmetric and marginal costs are constant, an horizontal merger is welfare enhancing if efficiency gains are high enough for the merger to take place. The presence of a competitive (or monopolistic) outside market that also trades in the permits market makes profitable a merger that would not happen otherwise. When firms are vertically related in an input-output chain, an horizontal merger in one of the markets increases profits in the other market due to the permits price decrease. Finally we consider an oligopoly-fringe model in which firms differ in their marginal production costs. A merger between the dominant oligopolistic firms decreases the permits price and is always profitable. Such setting is relevant to assess the observed mergers between power generators in several market for permits, like the Regional Greenhouse Gas Initiative (RGGI), allowing us to derive some policy recommendations.
Adopting disruptive technologies for decarbonizing hard-to-abate industrial sectors requires experimentation through demonstration (pilot) projects. However, from an economic perspective, the potential long-term benefits and the difficulties in designing relevant public policies are not addressed in the standard valuations of those projects.
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