The two previous chapters considered issues that not only have been recognized by the control authorities, but have had specific procedures developed to deal with them. Though these procedures have, on occasion, been somewhat crude, the fact remains that the current reform package has begun the process of coping with these particular challenges to the design of a smoothly running emissions trading program.
In contrast, neither EPA nor the states seem to have given much thought to the potential for market power to disrupt emissions trading. The rules governing the program do not reflect any particular concern with market power. If anything, the current rules increase, rather than reduce, the potential for market power.
Is this lack of concern justified? Under what circumstances can market power arise? What are the consequences of market power? Is it a serious problem? Does it threaten the ability of the program to meet its objectives? Can steps be taken to mitigate adverse consequences when necessary?
In the search for answers to these questions, we shall consider two rather different types of market power. The first type occurs when an aggressive source seeks to reduce its expenditure on emission credits or permits by manipulating the price. What happens to the other sources in this type of market power is incidental, not central; power over the permit market is an end in itself.
In the second type, a source or coalition of sources would attempt to use power in the permit or credit market as leverage in gaining power in product markets. By reducing the influence of its competitors, a