Auctioning emission permits in a leader-follower setting

Francisco Alvarez and Francisco André

MPRA Paper from University Library of Munich, Germany

Abstract: We analise emission permit auctions under leader-follower competition when the leader bids strategically and the follower acts as price-taker both at the auction and the secondary market. We obtain linear equilibrium bidding strategies for both firms and a unique equilibrium of the auction, which is optimal ex-post for the leader. Under specific distributional assumptions we conclude that the auction always awards less permits to the leader than the cost-effective amount. Our central result is a cautionary note on the properties of auctioning under market power. Under interior solution the auction allocation is dominated by grandfathering in terms of aggregated cost with probability one. As a policy implication, the specific design of the auction turns out to be crucial for cost-effectiveness. The chances of the auction to outperform grandfathering require that the former is capable of diluting the market power that is present in the secondary market.

Keywords: Cap-and-trade systems; auctions; grandfathering; market power; Bayesian games of incomplete information. (search for similar items in EconPapers)
JEL-codes: D44 L13 Q58 (search for similar items in EconPapers)
Date: 2015-01-29
New Economics Papers: this item is included in nep-ene and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:61698

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