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Carbon auctions, energy markets & market power: An experimental analysis

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  • Dormady, Noah C.

Abstract

This paper provides an experimental analysis of a simultaneous energy-emissions market under conditions of market power. The experimental design employs real-world institutional features; including stochastic demand, permit banking, inter-temporal (multi-round) dynamics, a tightening cap, and resale. The results suggest that dominant firms can utilize energy-emissions market linkages to simultaneously inflate the price of energy and suppress the price of emissions allowances. Whereas under prior market designs, regulators were concerned with dominant firms exercising their market power over the emissions market to exclude rivals and manipulate the permit market by hoarding permits; the results of this paper suggest that this strategy is less profitable to dominant firms in contemporary auction-based markets than strategic capacity withholding in the energy market and associated demand reduction in the emissions market.

Suggested Citation

  • Dormady, Noah C., 2014. "Carbon auctions, energy markets & market power: An experimental analysis," Energy Economics, Elsevier, vol. 44(C), pages 468-482.
  • Handle: RePEc:eee:eneeco:v:44:y:2014:i:c:p:468-482
    DOI: 10.1016/j.eneco.2014.03.013
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    Cited by:

    1. Vera, Sonia & Sauma, Enzo, 2015. "Does a carbon tax make sense in countries with still a high potential for energy efficiency? Comparison between the reducing-emissions effects of carbon tax and energy efficiency measures in the Chile," Energy, Elsevier, vol. 88(C), pages 478-488.
    2. Noah Dormady, 2016. "Carbon Auction Revenue and Market Power: An Experimental Analysis," Energies, MDPI, Open Access Journal, vol. 9(11), pages 1-20, November.
    3. Tang, Ling & Wu, Jiaqian & Yu, Lean & Bao, Qin, 2015. "Carbon emissions trading scheme exploration in China: A multi-agent-based model," Energy Policy, Elsevier, vol. 81(C), pages 152-169.
    4. repec:eee:quaeco:v:65:y:2017:i:c:p:182-193 is not listed on IDEAS
    5. repec:eee:rensus:v:74:y:2017:i:c:p:1314-1322 is not listed on IDEAS
    6. Tang, Ling & Wu, Jiaqian & Yu, Lean & Bao, Qin, 2017. "Carbon allowance auction design of China's emissions trading scheme: A multi-agent-based approach," Energy Policy, Elsevier, vol. 102(C), pages 30-40.

    More about this item

    Keywords

    Emissions market; Energy market; Market power; Experimental economics;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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