Advanced Search
MyIDEAS: Login to save this article or follow this journal

Market power in cap-and-trade auctions: A Monte Carlo approach

Contents:

Author Info

  • Dormady, Noah C.

Abstract

Recent greenhouse gas auctions have resulted in base level prices while remaining significantly concentrated. How do dominant firms receive such a large share of emissions allowances without bidding up the market price? This paper provides a Monte Carlo simulation analysis based on a contemporary regional greenhouse gas market in the United States. It introduces a C# simulation software environment, Oligopsony 1.0 that simulates uniform-price emissions auctions in repeated iterations. The results of these simulations indicate that there can be significant non-linearities between profit and market power as exercised through strategic demand reduction. This analysis finds the optimum point of strategic demand reduction that enables firms to exploit these non-linearities. The use of auctions to distribute tradeable pollution rights to firms in heavily concentrated markets can have significant unintended consequences, as it can exacerbate the problems of market power that exist within those markets.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0301421513005077
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 62 (2013)
Issue (Month): C ()
Pages: 788-797

as in new window
Handle: RePEc:eee:enepol:v:62:y:2013:i:c:p:788-797

Contact details of provider:
Web page: http://www.elsevier.com/locate/enpol

Related research

Keywords: Cap-and-trade; Auctions; Market power;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III & Dallas Burtraw, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," NBER Working Papers 6464, National Bureau of Economic Research, Inc.
  2. Charles Zhoucheng Zheng, 2002. "Optimal Auction with Resale," Econometrica, Econometric Society, Econometric Society, vol. 70(6), pages 2197-2224, November.
  3. Arimura, Toshi H., 2002. "An Empirical Study of the SO2 Allowance Market: Effects of PUC Regulations," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 271-289, September.
  4. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1376-1405, December.
  5. Carlos Chavez & John K. Stranlund, 2000. "Enforcing Transferable Permit Systems in the Presence of Market Power," Working Papers, Departamento de Economía, Universidad de Concepción 04-2000, Departamento de Economía, Universidad de Concepción.
  6. Kremer, Ilan & Nyborg, Kjell G, 2004. "Underpricing and Market Power in Uniform Price Auctions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4363, C.E.P.R. Discussion Papers.
  7. A. Lans Bovenberg & Lawrence H. Goulder, 1994. "Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses," NBER Working Papers 4897, National Bureau of Economic Research, Inc.
  8. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 703-725, Winter.
  9. Richard Engelbrecht-Wiggans & John A. List & David H. Reiley, 2006. "Demand Reduction In Multi-Unit Auctions With Varying Numbers Of Bidders: Theory And Evidence From A Field Experiment ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 203-231, 02.
  10. Rod Garrat & Thomas Tröger, 2005. "Speculation in Standard Auctions with Resale," Bonn Econ Discussion Papers, University of Bonn, Germany bgse10_2005, University of Bonn, Germany.
  11. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, 9.
  12. Grimm, Veronika & Riedel, Frank & Wolfstetter, Elmar, 2003. "Low price equilibrium in multi-unit auctions: the GSM spectrum auction in Germany," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(10), pages 1557-1569, December.
  13. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-64.
  14. Ruth, Matthias & Gabriel, Steven A. & Palmer, Karen L. & Burtraw, Dallas & Paul, Anthony & Chen, Yihsu & Hobbs, Benjamin F. & Irani, Daraius & Michael, Jeffrey & Ross, Kim M. & Conklin, Russell & Mill, 2008. "Economic and energy impacts from participation in the regional greenhouse gas initiative: A case study of the State of Maryland," Energy Policy, Elsevier, Elsevier, vol. 36(6), pages 2279-2289, June.
  15. Andrew Muller, R. & Mestelman, Stuart & Spraggon, John & Godby, Rob, 2002. "Can Double Auctions Control Monopoly and Monopsony Power in Emissions Trading Markets?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 70-92, July.
  16. Malik, Arun S., 2002. "Further Results on Permit Markets with Market Power and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 371-390, November.
  17. Bernard, John C. & Mount, Timothy D. & Schulze, William D., 1998. "Alternative Auction Institutions For Electric Power Markets," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 27(2), October.
  18. Holt, Charles A, 1989. "The Exercise of Market Power in Laboratory Experiments," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 32(2), pages S107-30, October.
  19. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 1085-89, September.
  20. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
  21. Rogerson, William P, 1984. "A Note on the Incentive for a Monopolist to Increase Fixed Costs as a Barrier to Entry," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(2), pages 399-402, May.
  22. Hagem, Cathrine & Westskog, Hege, 1998. "The Design of a Dynamic Tradeable Quota System under Market Imperfections," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 89-107, July.
  23. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(1), pages 19-34, September.
  24. Peter Cramton & Suzi Kerr, 2002. "Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Papers of Peter Cramton 02eptc, University of Maryland, Department of Economics - Peter Cramton, revised 06 May 2002.
  25. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 267-71, May.
  26. David Lucking-Reiley & John A. List, 2000. "Demand Reduction in Multiunit Auctions: Evidence from a Sportscard Field Experiment," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 961-972, September.
  27. Donald N Dewees, 2006. "Pollution and the Price of Power," Working Papers tecipa-246, University of Toronto, Department of Economics.
  28. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  29. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, Springer, vol. 29(3), pages 283-302, 05.
  30. Wråke, Markus & Myers, Erica & Mandell, Svante & Holt, Charles & Burtraw, Dallas, 2008. "Pricing Strategies under Emissions Trading: An Experimental Analysis," Discussion Papers, Resources For the Future dp-08-49, Resources For the Future.
  31. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 669-85, September.
  32. Rod Garratt & Thomas Troger, 2004. "Speculation in Standard Auctions with Resale," Microeconomics, EconWPA 0405005, EconWPA.
  33. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, American Finance Association, vol. 16(1), pages 8-37, 03.
  34. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 402, California Institute of Technology, Division of the Humanities and Social Sciences.
  35. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers, Resources For the Future dp-97-18-rev, Resources For the Future.
  36. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  37. Charles A. Holt & William Shobe & Dallas Burtraw & Karen Palmer & Jacob K. Goeree, 2007. "Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative," Reports, Center for Economic and Policy Studies 2007-03, Center for Economic and Policy Studies.
  38. van Egteren, Henry & Weber, Marian, 1996. "Marketable Permits, Market Power, and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 161-173, March.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:62:y:2013:i:c:p:788-797. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.