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Revenue and efficiency in pollution permit allocation mechanisms

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  • Khezr, Peyman
  • MacKenzie, Ian A.

Abstract

A contentious design issue within pollution markets is the choice of initial allocation mechanism. Within this debate, auctions have become the predominant method of allocation. Although auctions provide potential gains—such as revenue generation, efficiency, and price discovery—these benefits are rarely realized due to firms submitting non-truthful bids. We propose a mechanism that can improve on existing auctions. We allow the regulator to determine the supply once all bids have been submitted. This incites truthful revelation of firms' private abatement costs, maximizes revenue, and allocates permits efficiently. This is relevant to existing permit auctions in the US and Europe.

Suggested Citation

  • Khezr, Peyman & MacKenzie, Ian A., 2021. "Revenue and efficiency in pollution permit allocation mechanisms," Energy Economics, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:eneeco:v:93:y:2021:i:c:s014098832030373x
    DOI: 10.1016/j.eneco.2020.105033
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    Cited by:

    1. Friesen, Lana & Gangadharan, Lata & Khezr, Peyman & MacKenzie, Ian A., 2022. "Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative," Journal of Environmental Economics and Management, Elsevier, vol. 112(C).
    2. Jae-Do Song & Young-Hwan Ahn, 2021. "Price Discovery of Consignment Auctions for Emission Permits," Energies, MDPI, vol. 14(21), pages 1-13, October.
    3. Wang, Xu & Zhu, Lei & Liu, Pengfei, 2021. "Manipulation via endowments: Quantifying the influence of market power on the emission trading scheme," Energy Economics, Elsevier, vol. 103(C).

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    More about this item

    Keywords

    Multi-unit auction; Pollution permit;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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