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Auctioning Versus Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information

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  • Francisco Álvarez
  • Francisco André

Abstract

We compare auctioning and grandfathering as allocation mechanisms of emission permits when there is a secondary market with market power and firms have private information on their own abatement technologies. Based on real-life cases such as the EU ETS, we consider a multi-unit, multi-bid uniform auction. At the auction, each firm anticipates its role in the secondary market, either as a leader or a follower. This role affects each firms’ valuation of the permits (which are not common across firms) as well as their bidding strategies and it precludes the auction from generating a cost-effective allocation of permits, as it occurs in simpler auction models. Auctioning tends to be more cost-effective than grandfathering when the firms’ abatement cost functions are sufficiently different from one another, especially if the follower has lower abatement costs than the leader and the dispersion of the marginal costs is large enough. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Francisco Álvarez & Francisco André, 2015. "Auctioning Versus Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(4), pages 873-906, December.
    • Handle: RePEc:kap:enreec:v:62:y:2015:i:4:p:873-906
    DOI: 10.1007/s10640-014-9839-z
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    3. Noah Dormady, 2016. "Carbon Auction Revenue and Market Power: An Experimental Analysis," Energies, MDPI, vol. 9(11), pages 1-20, November.

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    More about this item

    Keywords

    Cap-and-trade systems; Auctions; Grandfathering ; Market power; Incomplete information; D44; Q58; L13;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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