Imperfect market, emissions trading scheme, and technology adoption: A case study of an energy-intensive sector

Highlights: • We provide a framework for technology upgrading among heterogeneous firms. • We propose a dynamic game model for firms' exclusionary manipulation in the ETS. • Firms' production capacity changes their sequence order of technological adoption. • Firm's market power accelerates the diffusion of a new abatement technology. • Adoption benefits from strategic effect are larger than those from direct effect. -- Abstract: It is widely accepted that the firms included in an emissions trading scheme (ETS) come mostly from oligopolistic industries. The "exclusionary manipulation" of these heterogeneous emitters can distort both output and permit markets and lead to differences in abatement technology adoption. We studied the impacts of asymmetric firms' market power on the diffusion of abatement technologies. A model for technology adoption among heterogeneous firms has been established, which takes into account diversity in production capacity and the integration of firms' strategic behaviour in both the carbon permit and the output markets. Our model reveals that, considering the direct and strategic effects in adoption benefits, firms' production capacity can directly determine their sequence order of adoption, and their market power can accelerate the diffusion of a new abatement technology. A case study of an energy-intensive sector in China is illustrated to support the conclusions derived from the model and help policymakers better understand the diffusion of abatement technologies under imperfect market structure.