IDEAS home Printed from https://ideas.repec.org/a/kap/regeco/v49y2016i3d10.1007_s11149-016-9299-1.html
   My bibliography  Save this article

Uncertainty and speculators in an auction for emissions permits

Author

Listed:
  • Corina Haita-Falah

    () (University of Kassel)

Abstract

Abstract Auctions have become popular as means of allocating emissions permits in the emissions trading schemes developed around the world. Mostly, only a subset of the regulated polluters participate in these auctions along with speculators, creating a market with relatively few participants and, thus, incentive for strategic bidding. I characterize the bidding behavior of the polluters and the speculators, examining the effect of the latter on the profits of the former and on the auction outcome. It turns out that in addition to bidding for compliance, polluters also bid for speculation in the aftermarket. While the presence of the speculators forces the polluters to bid closer to their true valuations, it also creates a trade-off between increasing the revenue accrued to the regulator and reducing the profits of the auction-participating polluters. Nevertheless, the profits of the latter increase in the speculators’ risk aversion.

Suggested Citation

  • Corina Haita-Falah, 2016. "Uncertainty and speculators in an auction for emissions permits," Journal of Regulatory Economics, Springer, vol. 49(3), pages 315-343, June.
  • Handle: RePEc:kap:regeco:v:49:y:2016:i:3:d:10.1007_s11149-016-9299-1
    DOI: 10.1007/s11149-016-9299-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11149-016-9299-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Regina Betz & Stefan Seifert & Peter Cramton & Suzi Kerr, 2010. "Auctioning greenhouse gas emissions permits in Australia ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(2), pages 219-238, April.
    2. PAOLO COLLA & MARC GERMAIN & VINCENT Van STEENBERGHE, 2012. "Environmental Policy and Speculation on Markets for Emission Permits," Economica, London School of Economics and Political Science, vol. 79(313), pages 152-182, January.
    3. Rohit Rahi & José M. Marín, 1999. "Speculative securities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 653-668.
    4. Wirl, Franz, 2009. "Oligopoly meets oligopsony: The case of permits," Journal of Environmental Economics and Management, Elsevier, vol. 58(3), pages 329-337, November.
    5. 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.
    6. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
    7. Juan-Pablo Montero, 2009. "Market Power in Pollution Permit Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    8. Dallas Burtraw & Jacob Goeree & Charles A. Holt & Erica Myers & Karen Palmer & William Shobe, 2009. "Collusion in auctions for emission permits: An experimental analysis," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(4), pages 672-691.
    9. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market: A case-study of the 2006 compliance event," Energy Policy, Elsevier, vol. 37(1), pages 15-28, January.
    10. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    11. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-216, June.
    12. Maeda, Akira, 2003. "The Emergence of Market Power in Emission Rights Markets: The Role of Initial Permit Distribution," Journal of Regulatory Economics, Springer, vol. 24(3), pages 293-314, November.
    13. Rod Garratt & Thomas Tröger, 2006. "Speculation in Standard Auctions with Resale," Econometrica, Econometric Society, vol. 74(3), pages 753-769, May.
    14. Marco Pagnozzi, 2007. "Bidding to lose? Auctions with resale," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1090-1112, December.
    15. Jacob K. Goeree & Charles A. Holt & Karen Palmer & William Shobe & Dallas Burtraw, 2010. "An Experimental Study of Auctions Versus Grandfathering to Assign Pollution Permits," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 514-525, 04-05.
    16. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    17. Eva Benz & Andreas Löschel & Bodo Sturm, 2010. "Auctioning of CO 2 emission allowances in Phase 3 of the EU Emissions Trading Scheme," Climate Policy, Taylor & Francis Journals, vol. 10(6), pages 705-718, November.
    18. 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.
    19. Aatola, Piia & Ollikainen, Markku & Toppinen, Anne, 2013. "Price determination in the EU ETS market: Theory and econometric analysis with market fundamentals," Energy Economics, Elsevier, vol. 36(C), pages 380-395.
    20. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
    21. Ross Baldick & Ryan Grant & Edward Kahn, 2004. "Theory and Application of Linear Supply Function Equilibrium in Electricity Markets," Journal of Regulatory Economics, Springer, vol. 25(2), pages 143-167, March.
    22. repec:dau:papers:123456789/4221 is not listed on IDEAS
    23. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    24. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
    25. Matti Keloharju & Kjell G. Nyborg & Kristian Rydqvist, 2005. "Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions," Journal of Finance, American Finance Association, vol. 60(4), pages 1865-1902, August.
    26. Charles A. Holt & William Shobe & Dallas Burtraw & Karen Palmer & Jacob K. Goeree, 2007. "Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative," Reports 2007-03, Center for Economic and Policy Studies.
    27. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
    28. David Malueg & Andrew Yates, 2009. "Bilateral Oligopoly, Private Information, and Pollution Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(4), pages 553-572, August.
    29. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 675-689.
    30. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    31. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
    32. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    33. Baldursson, Fridrik M & von der Fehr, N.-H.M.Nils-Henrik M, 2004. "Price volatility and risk exposure: on market-based environmental policy instruments," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 682-704, July.
    34. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cap-and-trade program; Emissions trading; Risk aversion; Speculators; Uniform-price auction;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:regeco:v:49:y:2016:i:3:d:10.1007_s11149-016-9299-1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.