The consignment mechanism in carbon markets: A laboratory investigation

Unlike other auction-based carbon emission markets, California's carbon market (AB32) utilizes a consignment auction design in which utilities are allocated a share of emissions permits that they must sell into the uniform-price auction. Auction revenue is returned to the consignee, which creates an incentive to increase the auction clearing price through strategic bidding. In a numerical example, we identify the incentive that consignees have to overstate their quantity demanded in the auction, since this increases the probability that the auction clears at a higher price. This results in inefficient allocations and inflated auction prices. We test this effect through a series of laboratory experiments and confirm these predictions. Findings indicate that short-run firm profits are lower in a consignment auction than in a non-consignment auction market, and that firms are more likely to not receive the quantity of permits they need for program compliance in the auction. We conclude with implications for the design and modification of future Coasian markets.