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Auctioning Emission Permits with Market Power

Author

Listed:
  • Alvarez Francisco

    (Department of Economic Analysis, Universidad Complutense de Madrid, Campus de Somosaguas, 28223 Pozuelo de Alarcón, Madrid, Spain)

  • André Francisco J.

    (Department of Economic Analysis, Universidad Complutense de Madrid, Campus de Somosaguas, 28223 Pozuelo de Alarcón, Madrid, Spain)

Abstract

We analyze emission permit auctions in a framework in which a dominant firm enjoys market power both in the auction and in the secondary market while its competitor behaves in a competitive way. We obtain linear equilibrium bidding strategies for both firms and a unique equilibrium of the auction, which is optimal ex-post for the dominant firm. Under specific distributional assumptions we conclude that the auction always awards less permits to the dominant firm than the cost-effective amount. Our results serve as a warning about the properties of auctioning under market power. Under interior solution the auction allocation is dominated by grandfathering in terms of aggregated cost with probability one. As a policy implication, the specific design of the auction turns out to be crucial for cost-effectiveness. The chances of the auction to outperform grandfathering require that the former is capable of diluting the market power that is present in the secondary market.

Suggested Citation

  • Alvarez Francisco & André Francisco J., 2016. "Auctioning Emission Permits with Market Power," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(4), pages 1-28, October.
    • Handle: RePEc:bpj:bejeap:v:16:y:2016:i:4:p:28:n:3
    DOI: 10.1515/bejeap-2015-0041
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    References listed on IDEAS

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    1. Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
    2. Haile, Philip A., 2000. "Partial Pooling at the Reserve Price in Auctions with Resale Opportunities," Games and Economic Behavior, Elsevier, vol. 33(2), pages 231-248, November.
    3. Michel Mougeot & Florence Naegelen & Benjamin Pelloux & Jean‐Louis Rullière, 2011. "Breaking Collusion in Auctions through Speculation: An Experiment on CO 2 Emission Permit Markets," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(5), pages 829-856, October.
    4. Cameron Hepburn & Michael Grubb & Karsten Neuhoff & Felix Matthes & Maximilien Tse, 2006. "Auctioning of EU ETS phase II allowances: how and why?," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 137-160, January.
    5. Veronika Grimm & Lyuba Ilieva, 2013. "An experiment on emissions trading: the effect of different allocation mechanisms," Journal of Regulatory Economics, Springer, vol. 44(3), pages 308-338, December.
    6. repec:dau:papers:123456789/10174 is not listed on IDEAS
    7. 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.
    8. Francisco Alvarez & Cristina Mazón, 2012. "Multi-unit auctions with private information: an indivisible unit continuous price model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(1), pages 35-70, September.
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    Cited by:

    1. Alfred Endres & Tim Friehe & Bianca Rundshagen, 2020. "Diffusion and adoption of advanced emission abatement technology induced by permit trading," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1313-1337, September.
    2. Jiasen Sun & Guo Li, 2020. "Designing a double auction mechanism for the re-allocation of emission permits," Annals of Operations Research, Springer, vol. 291(1), pages 847-874, August.
    3. Francisco Alvarez & Cristina Mazón & Francisco Javier André, 2019. "Assigning pollution permits: are uniform auctions efficient?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 211-248, February.

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