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Cost containment in pollution auctions

Author

Listed:
  • Lana Friesen

    () (School of Economics, The University of Queensland)

  • Lata Gangadharan

    () (Department of Economics, Monash University, Australia)

  • Peyman Khezr

    () (School of Economics, The University of Queensland)

  • Ian A. MacKenzie

    () (School of Economics, The University of Queensland)

Abstract

This article investigates supply reserves in pollution permit auctions. A supply reserve is a fixed quantity of permits that is automatically released if the initial clearing price is sufficiently high. The main rationale for using such a reserve is for cost containment: to lower the final clearing price. We show the inclusion of a reserve does exactly the opposite and provide corroborating experimental evidence. Relative to a benchmark without a supply reserve, we find that the introduction of a supply reserve will actually increase the clearing price, increase the revenue from the auction, and increase auction efficiency. The clearing price also increases in the level of the trigger price and relative size of the reserve. This has important implications for supply reserves currently in use, such as the Cost Containment Reserve (CCR) within the US Regional Greenhouse Gas Initiative (RGGI)

Suggested Citation

  • Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2019. "Cost containment in pollution auctions," Discussion Papers Series 610, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:610
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    File URL: http://www.uq.edu.au/economics/abstract/610.pdf
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    References listed on IDEAS

    as
    1. Holt, Charles A. & Shobe, William M., 2016. "Reprint of: Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 69-86.
    2. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2014. "Price controls and banking in emissions trading: An experimental evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 71-86.
    3. Damianov, Damian S. & Becker, Johannes Gerd, 2010. "Auctions with variable supply: Uniform price versus discriminatory," European Economic Review, Elsevier, vol. 54(4), pages 571-593, May.
    4. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2011. "An experimental analysis of compliance in dynamic emissions markets," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 414-429.
    5. Shobe, William & Palmer, Karen & Myers, Erica & Holt, Charles & Goeree, Jacob & Burtraw, Dallas, 2010. "An Experimental Analysis of Auctioning Emission Allowances Under a Loose Cap," Agricultural and Resource Economics Review, Cambridge University Press, vol. 39(2), pages 162-175, April.
    6. David F. Perkis & Timothy N. Cason & Wallace E. Tyner, 2016. "An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 703-718, April.
    7. McAdams, David, 2007. "Adjustable supply in uniform price auctions: Non-commitment as a strategic tool," Economics Letters, Elsevier, vol. 95(1), pages 48-53, April.
    8. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, vol. 73(1), pages 29-34, October.
    9. Rachel Bodsky & Domenic Donato & Kevin James & David Porter, 2012. "Experimental Evidence on the Properties of the California’s Cap and Trade Price Containment Reserve," Working Papers 12-12, Chapman University, Economic Science Institute.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    multi-unit auction; uniform-price; supply reserve; pollution permits; experiment.;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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