Auctioning Emission Permits with Market Power

Alvarez Francisco () and Francisco André
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Alvarez Francisco: Department of Economic Analysis, Universidad Complutense de Madrid, Campus de Somosaguas, 28223 Pozuelo de Alarcón, Madrid, Spain
Authors registered in the RePEc Author Service: Francisco Alvarez Gonzalez ()

The B.E. Journal of Economic Analysis & Policy, 2016, vol. 16, issue 4, 28

Abstract: We analyze emission permit auctions in a framework in which a dominant firm enjoys market power both in the auction and in the secondary market while its competitor behaves in a competitive way. We obtain linear equilibrium bidding strategies for both firms and a unique equilibrium of the auction, which is optimal ex-post for the dominant firm. Under specific distributional assumptions we conclude that the auction always awards less permits to the dominant firm than the cost-effective amount. Our results serve as a warning about 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)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1515/bejeap-2015-0041

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