Auctioning Versus Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information

Álvarez, Francisco; André, Francisco J.

doi:10.1007/s10640-014-9839-z

Cited by 28 publications

(14 citation statements)

References 23 publications

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“…In reality, it is common that the participants in CAP systems receive a number of permits for free by means of a grandfathering scheme. In fact, as it is discussed for example in Alvarez and André (2014), grandfathering has traditionally been the most widespread method to distribute permits.…”

Section: Grandfatheringmentioning

confidence: 99%

Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

André

Castro

2015

SSRN Journal

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It has been shown in prior research that cost effectiveness in the competitive emissions permit market could be affected by tacit collusion or price manipulation when the corresponding polluting product market is oligopolistic. We analyze these cross market links using a Stackelberg model to show that under reasonable assumptions, there are no incentives to collude for lobbying prices up. However, incentives for manipulating the price of permits up appear if there is an initial free allocation of permits, which is a policy argument against grandfathering and in favor of auctioning. This effect is increasing with the amount of permits allocated to the leader. Moreover, the changes for price manipulation increase with those changes that tend to undermine the leader's advantage in output production or to reduce the leader's abatement cost.JEL code: D43, L13, Q58

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Section: Grandfatheringmentioning

confidence: 99%

Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

André

Castro

2015

SSRN Journal

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“…However, the issue of market power, which has been identified in both the scholarly literature and in practice, in both electricity markets [6][7][8][9][10][11][12][13] and cap-and-trade markets [14][15][16][17][18][19][20][21][22][23][24], may have a noticeable effect on states' ability to raise revenue under carbon markets modeled after RGGI or California. Market power is exercised in carbon auctions (detailed below) as strategic demand reduction (i.e., a strategic bidding…”

Section: Introductionmentioning

confidence: 99%

Carbon Auction Revenue and Market Power: An Experimental Analysis

Dormady

2016

Energies

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State and regional governments in the U.S. and abroad are looking to market-based approaches to mitigating greenhouse gas emissions from the electric sector, and in the U.S. as a compliance approach to meeting the aggressive targets of the Environmental Protection Agency (EPA)'s Clean Power Plan. Auction-based approaches, like those used in the Northeast U.S. and California, are both recommended strategies under the Plan and attractive to state governments because they can generate significant revenue from the sale of emissions permits. However, given the nature of imperfect competition in existing electricity markets, particularly at the state and regional level, the issue of market power is a concern at the forefront. This paper provides the results from a controlled laboratory experiment of an auction-based emissions market in the electricity sector. The results show that government revenue from auctioning emissions permits is substantially lower when market concentration is only moderately increased. The results hold significant implications for states and other subnational governments that have high revenue expectations from the auctioning of emissions permits.

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“…Antelo and Bru (2009) compare auctioning and grandfathering in a permit market with a dominant firm when the government is concerned both about cost-effectiveness and public revenue. Alvarez and André (2015b) and Alvarez and André (2015a) also compare auctioning and grandfathering when there is a secondary market with market power and firms have private information on their own abatement technologies. Kline and Menezes (1999) examine a stylized version of EPA double auctions between buyers and sellers.…”

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confidence: 99%

“…Antelo and Bru (2009) assume perfect information, and hence omit one of the main ingredients of auctions. Alvarez and André (2015b) consider that the bidders act non-strategically and in Alvarez and André (2015a) only one firm (the dominant one) bids strategically. Kline and Menezes (1999) do not address the use of auctions to make the initial allocation of permits by the environmental authority (as it is done in the UE ETS), but only to exchange permits among firms.…”

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confidence: 99%

Assigning pollution permits: are uniform auctions efficient?

2017

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We study the efficiency of the uniform auction as an allocation mechanism for emission permits among polluting firms. In our model, firms have private information about their abatement costs, which differ across firms and across units, and bidders' demands are linear. We show that there is a continuum of interior Bayesian-Nash equilibria, and only one is efficient, minimizing abatement costs. We find that the existence of many bidders is not a sufficient condition to guarantee an efficient equilibrium in the uniform auction. Additionally, bidders' types have to be uncorrelated. JEL classification D44(Auctions)

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Auctioning Versus Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information

Cited by 28 publications

References 23 publications

Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

Carbon Auction Revenue and Market Power: An Experimental Analysis

Assigning pollution permits: are uniform auctions efficient?

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