Permit Market Auctions with Allowance Reserves

Peyman Khezr and Ian MacKenzie

No 553, Discussion Papers Series from University of Queensland, School of Economics

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.

Keywords: permit auction; allowance reserve (search for similar items in EconPapers)
JEL-codes: D44 Q52 (search for similar items in EconPapers)
Date: 2016-01-14
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://economics.uq.edu.au/files/46105/553.pdf (application/pdf)

Related works:
Journal Article: Permit market auctions with allowance reserves (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:553

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