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Abstract
We analyse the efficiency effects of the initial permit allocation given to firms
with market power in both permit and output market. We examine two models: a long-
run model with endogenous technology and capacity choice, and a short-run model with
fixed technology and capacity. In the long run, quantity pre-commitment with Bertrand
competition can yield Cournot outcomes also under emissions trading. In the short run,
Bertrand output competition reproduces the effects derived under Cournot competition,
but displays higher pass-through profits. In a second-best setting of overallocation, a
tighter emissions target tends to improve permit-market efficiency in the short run.