Market power in cap-and-trade auctions: A Monte Carlo approach

Noah Dormady ()

Energy Policy, 2013, vol. 62, issue C, 788-797

Abstract: Recent greenhouse gas auctions have resulted in base level prices while remaining significantly concentrated. How do dominant firms receive such a large share of emissions allowances without bidding up the market price? This paper provides a Monte Carlo simulation analysis based on a contemporary regional greenhouse gas market in the United States. It introduces a C# simulation software environment, Oligopsony 1.0 that simulates uniform-price emissions auctions in repeated iterations. The results of these simulations indicate that there can be significant non-linearities between profit and market power as exercised through strategic demand reduction. This analysis finds the optimum point of strategic demand reduction that enables firms to exploit these non-linearities. The use of auctions to distribute tradeable pollution rights to firms in heavily concentrated markets can have significant unintended consequences, as it can exacerbate the problems of market power that exist within those markets.

Keywords: Cap-and-trade; Auctions; Market power (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:62:y:2013:i:c:p:788-797

DOI: 10.1016/j.enpol.2013.06.022

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