Auctioning emission permits with market power



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Álvarez González, Francisco and André García, Francisco Javier (2016) Auctioning emission permits with market power. B.E. Journal of Economic Analysis Policy, 16 (4). ISSN 1935-1682

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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.

Item Type:Article
Uncontrolled Keywords:Cap-and-trade systems; Auctions; Grandfathering; Market power; Bayesian games of incomplete information.
Subjects:Social sciences > Economics > Commerce
Social sciences > Economics > Microeconomics
ID Code:55343
Deposited On:21 May 2019 09:48
Last Modified:25 May 2023 08:38

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