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Cost containment in pollution auctions

Lana Friesen (), Lata Gangadharan, Peyman Khezr () and Ian MacKenzie ()

No 610, Discussion Papers Series from University of Queensland, School of Economics

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)

Keywords: multi-unit auction; uniform-price; supply reserve, pollution permits, experiment. (search for similar items in EconPapers)
JEL-codes: C91 C92 Q58 (search for similar items in EconPapers)
Date: 2019-09-20
New Economics Papers: this item is included in nep-des, nep-ene, nep-env, nep-exp and nep-reg
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