Russian exports of emission permits under the Kyoto Protocol: The interplay with non-competitive fuel markets

The paper analyses optimal strategies for a country that has market power in an international market for emission permits at the same time as a domestic fuel producer participates in a non-competitive fuel export market. In particular, the effects of coordinating fuel and permit exports are explored, We show that such coordination may either increase or reduce the optimal mark-up on permits, depending on the degree of substitution between alternative fuels. When the fuel market is oligopolistic, coordination of permit and fuel exports may lead to a strategic disadvantage in the fuel market, which makes such coordination unprofitable, However, illustrative numerical simulations suggest that Russia will benefit from coordinating its permit exports with its oil and gas exports during the Kyoto commitment period. (c) 2005 Elsevier B.V. All rights reserved.