The impact of CO₂emissions trading on firm profits and market prices

TLDR

The introduction of a mandatory CO₂ trading scheme covering about half of European emissions has sparked debate on its effect on industry competitiveness, with economic theory predicting that firms may pass costs to customers while still earning net profits thanks to price impacts and generous free allowance allocations. The study applies a Cournot oligopoly model to five energy‑intensive sectors—cement, newsprint, steel, aluminium, and petroleum—to assess the impact of emissions trading. The authors populate the Cournot model with empirical data and evaluate three future emissions‑price scenarios. The analysis shows that most sectors would profit overall, though steel and cement would lose some market share and aluminium could face closure, with cost pass‑through, output, market‑share, and profit changes varying across scenarios.

Abstract

Abstract The introduction of mandatory controls and a trading scheme covering approximately half of all carbon dioxide emissions across Europe has triggered a debate about the impact of emissions trading on the competitiveness of European industry. Economic theory suggests that, in many sectors, businesses will pass on costs to customers and make net profits due to the impact on product prices combined with the extensive free allocations of allowances. This study applies the Cournot representation of an oligopoly market to five energy-intensive sectors: cement, newsprint, steel, aluminium and petroleum. By populating the model with empirical data, the results are shown for three future emissions price scenarios. The results encompass the extent of cost pass-through to customers, changes in output, changes in UK market share, and changes in firm profits. The results suggest that most participating sectors would be expected to profit in general, although with a modest loss of market share in the case of steel and cement, and closure in the case of aluminium.