Price discovery in emissions permit auctions

Publication Type:
Chapter
Citation:
2011, 14 pp. 11 - 36
Issue Date:
2011-12-01
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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. Conclusion - Uniform-price auctions (clock and sealed-bid uniform-price, and continuous uniform-price) generate changes in purchase prices that are reasonably close to predicted changes. There is some evidence of tacit collusion causing prices to be too low relative to predictions in most cases. The worst price tracking was observed for discriminatory auctions. Application - Uniform-price auctions appear to perform at least as well as other auction designs with respect to discovery of efficient market prices when there are unexpected and unannounced changes in willingness to pay for permits.
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