Abstract: With China already committing to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060, green low carbon development has become an important theme in the longer term. In this context, the carbon market has become a crucial market-based tool to help achieve China’s climate goals and energy transition. The effect of market power in carbon emission trading market on the diffusion of a new low carbon emissions abatement technology when firms interact in imperfectly competitive output market is investigated. Based on the classical framework proposed by Reinganum, the extension is made by introducing heterogeneous firms to describe firms’ strategic behavior and a two-stage non-cooperative game model is developed. In the first stage, each firm need determine the optimal time to adopt the new emissions abatement technology, taking into account its benefits and costs, as well as its rival’s strategic behavior. The first stage is described as a simultaneous-move game. In the second stage, given the level of abatement technology, each firm makes its own optimal output and emission decisions based on the profit maximization principle. This second stage is described as a leader-follower game. With this framework, through theoretical analysis and numerical simulation, the results suggest that firms will delay to adopt the new emissions abatement technology in the presence of market power in carbon market. Moreover, it will induce much later technology diffusion when the output demand is smaller and less elastic. This implies that the technology diffusion in the weak elastic sector may have more barriers than in the strong elastic sector. More theoretical references are provided for the design and optimization of the carbon market to promote the diffusion of low carbon emission reduction technologies. The policymaker should pay more attention to the market structure of sector covered in the carbon market. Furthermore, the regulator can enhance the supervision for the key firms to cope with the side effects of market power.

Key words: carbon market; market power; technology adoption and diffusion; strategic behavior