Climate change policy and its effect on market power in the gas market

The European Emissions Trading Scheme (ETS) limits CO2 emissions from covered sectors, especially electricity (accounting for about 56%). At (sic)44 billion per annum. the ETS is the largest emissions trading system ever, 40 times larger than US programmes. The article demonstrates that fixing the quantity rather than the price of carbon reduces the price elasticity of demand for gas appreciably, amplifying the market power of gas suppliers, and amplifying the impact of gas price increases on the electricity price. A rough estimate using British data suggests that this could increase the Lerner Index by 50%.