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Auctioning versus grandfathering in cap-and-trade systems with market power and incomplete information

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André García, Francisco Javier and Álvarez González, Francisco (2015) Auctioning versus grandfathering in cap-and-trade systems with market power and incomplete information. Environmental and Resource Economics, 62 (4). pp. 873-906. ISSN 0924-6460

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Official URL: http://link.springer.com/article/10.1007/s10640-014-9839-z



Abstract

We compare auctioning and grandfathering as allocation mechanisms of emission permits when there is a secondary market with market power and firms have private information on their own abatement technologies. Based on real-life cases such as the EU ETS, we consider a multi-unit, multi-bid uniform auction. At the auction, each firm anticipates its role in the secondary market, either as a leader or a follower. This role affects each firms’ valuation of the permits (which are not common across firms) as well as their bidding strategies and it precludes the auction from generating a cost-effective allocation of permits, as it occurs in simpler auction models. Auctioning tends to be more cost-effective than grandfathering when the firms’ abatement cost functions are sufficiently different from one another, especially if the follower has lower abatement costs than the leader and the dispersion of the marginal costs is large enough.


Item Type:Article
Uncontrolled Keywords:Cap-and-trade systems, Auctions, Grandfathering, Market power, Incomplete information.
Subjects:Social sciences > Economics > Commerce
Social sciences > Economics > Microeconomics
JEL:D44, Q58, L13
ID Code:39498
Deposited On:19 Oct 2016 11:56
Last Modified:19 Dec 2016 13:13

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