Price Discovery in Emissions Permit Auctions

Emerald Group Publishing Limited
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Research in Experimental Economics: Experiments on Energy, the Environment, and Sustainability, 2011, 1, pp. 11 - 36
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Objective - This chapter examines the performance of the market to discover efficient equilibrium under alternative auction designs. Background Auctions are increasingly being used to allocate emissions allowances (permits) for cap and trade and common-pool resource management programs. These auctions create thick markets that can provide important information about changes in current market conditions. Methodology This chapter uses experimental methods to examine the extent to which the predicted increase in the Walrasian price due to a shift in willingness to pay (perhaps due to a shift in costs of pollution abatement) is reflected in observed sales prices under alternative auction formats. Results Price tracking is comparably good for uniform-price sealed-bid auctions and for multi-round clock auctions, with or without end-of-round information about excess demand. More price inertia is observed for pay as bid (discriminatory) auctions, especially for a continuous discriminatory format in which bids could be changed at will, in part because sniping in the final moments blocked the full effect of the demand shock.
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