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An Experimental Analysis of Auctioning Emission Allowances Under a Loose Cap

Published online by Cambridge University Press:  15 September 2016

William Shobe ,
Karen Palmer ,
Erica Myers ,
Charles Holt ,
Jacob Goeree  and
Dallas Burtraw
William Shobe
Affiliation:
Center for Economic and Policy Studies and Charles
Karen Palmer
Affiliation:
Resources for the Future in Washington, D.C.
Erica Myers
Affiliation:
Center for Economic and Policy Studies and Charles
Charles Holt
Affiliation:
Department of Economics at the University of Virginia in Charlottesville, Virginia
Jacob Goeree
Affiliation:
University of Zurich in Switzerland
Dallas Burtraw
Affiliation:
Resources for the Future in Washington, D.C.
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Abstract

The direct sale of emission allowances by auction is an emerging characteristic of cap-and-trade programs. This study is motivated by the observation that all of the major implementations of cap-and-trade regulations for the control of air pollution have started with a generous allocation of allowances relative to recent emissions history, a situation we refer to as a “loose cap.” Typically more stringent reductions are achieved in subsequent years of a program. We use an experimental setting to investigate the effects of a loose cap environment on a variety of auction types. We find that all auction formats studied are efficient in allocating emission allowances, but auction revenues tend to be lower relative to competitive benchmarks when the cap is loose. Regardless of whether the cap is tight or loose, the different auction formats tend to yield comparable revenues toward the end of a series of auctions. However, aggressive bidding behavior in initial discriminatory auctions yields higher revenues than in the other auction formats, a difference that disappears as bidders learn to adjust their bids closer to the cut-off that separates winning and losing bids.

Keywords

auctioncarbon dioxidegreenhouse gasesallowance tradingRegional Greenhouse Gas InitiativeRGGIcap and trade
Type
Contributed Papers
Information
Agricultural and Resource Economics Review , Volume 39 , Issue 2 , April 2010 , pp. 162 - 175
Copyright
Copyright © 2010 Northeastern Agricultural and Resource Economics Association 

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