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Permit Market Auctions with Allowance Reserves

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Abstract

This article investigates pollution permit auctions that incorporate allowance reserves. In these auctions the sale of a fixed quantity of permits is supplemented by an additional permit reserve. This reserve automatically releases permits if a sufficiently high price is triggered. The main justifications for implementing an allowance reserve are to reduce price volatility as well as assisting in cost containment. We show—paradoxically—that incorporating an allowance reserve into a permit auction can decrease firms’ payoffs, increase the clearing price, and increase the associated costs of compliance. This has direct policy implications for all major cap-and-trade markets, including the US Regional Greenhouse Gas Initiative.

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  • Peyman Khezr & Ian A. MacKenzie, 2016. "Permit Market Auctions with Allowance Reserves," Discussion Papers Series 553, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:553
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    Cited by:

    1. Khezr, Peyman & MacKenzie, Ian A., 2018. "Consignment auctions," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 42-51.
    2. Peyman Khezr, 2024. "Carbon Pricing and Resale in Emission Trading Systems," Papers 2407.07386, arXiv.org.
    3. Alex Dickson & Ian A. MacKenzie, 2022. "Permit Markets with Political and Market Distortions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 227-255, May.
    4. 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).
    5. Peyman Khezr & Ian A. MacKenzie, 2018. "An efficient and implementable auction for environmental rights," Discussion Papers Series 587, School of Economics, University of Queensland, Australia.
    6. Khezr, Peyman & MacKenzie, Ian A., 2021. "Revenue and efficiency in pollution permit allocation mechanisms," Energy Economics, Elsevier, vol. 93(C).
    7. Jae-Do Song & Young-Hwan Ahn, 2021. "Price Discovery of Consignment Auctions for Emission Permits," Energies, MDPI, vol. 14(21), pages 1-13, October.
    8. Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2020. "Mind your Ps and Qs! An Experiment on Variable Allowance Supply in the US Regional Greenhouse Gas Initiative," Discussion Papers Series 618, School of Economics, University of Queensland, Australia.
    9. Khezr, Peyman & MacKenzie, Ian A., 2018. "Permit market auctions with allowance reserves," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 283-306.
    10. Peyman Khezr & Anne Cumpston, 2022. "A review of multiunit auctions with homogeneous goods," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 1225-1247, September.
    11. Shiying Chen & Zhenhuan Dong & Chunming Cao & Changjun Zheng, 2022. "Strategy and design of multi‐unit auction in grouped asymmetric setting," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3435-3453, December.
    12. Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    13. Peyman Khezr & Ian A. MacKenzie, 2021. "An allocatively efficient auction for pollution permits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(4), pages 571-585, April.

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    More about this item

    Keywords

    permit auction; allowance reserve;

    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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