Scarcity climate rents under a carbon price with oligopoly competition

Abstract

Prior research has shown that environmental policy can create scarcity rents. We analyse this phenomenon in the framework of a duopoly that faces a carbon price, considering both Cournot and Stackelberg competition. We identify the different sources of scarcity rents, which we classify in ‘output’ and ‘grandfathering’ scarcity rents. The former depend on the elasticity of the rivals’ output to the carbon price, while the latter is exogenous. We also determine under which conditions these rents can be large enough to increase firms’ profits and, as a policy implication, to what extent the existence of scarcity rents can make the firms agree on a tougher policy. This event is more likely to happen under Cournot than under Stackelberg competition, and the chances increase if the firms are allowed to pollute a large amount without paying a price.