On Market Power, Permit Banking Borrowing, and Interactions with the Firm's Production Market

The carbon trading scheme has been recognized as a cost-saving and effective way to promote carbon emission abatement. This paper constructs an intertemporal carbon market model considering product market and market power in the carbon market to explore the intertemporal permit allocation conditions of carbon market efficiency in the whole compliance phase. Welfare performances of the carbon market with and without banking and borrowing systems are compared. Additionally, baseline permit allocation policy and hybrid permit allocation policy are introduced to investigate whether the two policies can alleviate the negative effect of market power on social welfare in the intertemporal carbon market. The results indicate that permit allocation conditions achieving intertemporal carbon market efficiency should satisfy that the sum of environmental effect and discounted marginal emissions abatement costs is equal across firms. Welfare in the carbon market with banking and borrowing systems is superior as long as total emission abatement costs are lower than those in the market without banking and borrowing systems. The optimal welfare performance between baseline permit allocation policy and hybrid permit allocation policy varies in different conditions.