This article investigates pollution permit consignment auctions. In this process firms obtain an initial endowment of permits that must be consigned to the auctioneer for sale. In the auction, firms bid for permits, obtain their equilibrium permit allocations, and receive revenue from their consigned permits. It has been proposed that this auction is politically attractive and generates clear price discovery. We provide the first theoretical analysis of this kind of auction. We show, in most cases, the auction does not provide a clear price signal. Our results have policy implications for many permit markets, including the California Cap-and-Trade Program.
This article investigates pollution permit auctions that incorporate allowance reserves. In these auctions the sale of a fixed quantity of permits is supplemented by an additional permit reserve. This reserve automatically releases permits if a sufficiently high price is triggered. The main justifications for implementing an allowance reserve are to reduce price volatility as well as assisting in cost containment. We show-paradoxically-that incorporating an allowance reserve into a permit auction can decrease firms' payoffs, increase the clearing price, and increase compliance costs. This has implications for all major cap-and-trade markets, including the US Regional Greenhouse Gas Initiative.
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