Simulation of a NOx-emission market in the Netherlands

This paper studies economic issues of air pollution control and in particular, the efficiency of a market for tradable emission permits with a public monopoly next to a competitive, private sector. The purpose is to build a simulation model to determine the extent of the interrelated inefficiencies in a NOx-emission market and the output markets of the (former) public electricity production and chemical industry in the Netherlands. A model of a competitive market for tradable emission permits with a public monopoly and a competitive private sector is constructed. The results show that the slightly inefficient production level and the x-inefficient costs of the public industry induce only small welfare losses in its output market, and, by means of the permit market, in the output market of the chemical industry. The public industry's utility function weight of emission reduction compared to output and x-inefficiency is rather small, implying that the NOx-emission market is virtually cost-effective. It appears that the presence of x-inefficiency in the public industry is the main determinant of the welfare loss.