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Cost containment in pollution auctions

Author

Listed:
  • Lana Friesen

    (School of Economics, The University of Queensland)

  • Lata Gangadharan

    (Department of Economics, Monash University, Australia)

  • Peyman Khezr

    (School of Economics, The University of Queensland)

  • Ian A. MacKenzie

    (School of Economics, The University of Queensland)

Abstract
This article investigates supply reserves in pollution permit auctions. A supply reserve is a fixed quantity of permits that is automatically released if the initial clearing price is sufficiently high. The main rationale for using such a reserve is for cost containment: to lower the final clearing price. We show the inclusion of a reserve does exactly the opposite and provide corroborating experimental evidence. Relative to a benchmark without a supply reserve, we find that the introduction of a supply reserve will actually increase the clearing price, increase the revenue from the auction, and increase auction efficiency. The clearing price also increases in the level of the trigger price and relative size of the reserve. This has important implications for supply reserves currently in use, such as the Cost Containment Reserve (CCR) within the US Regional Greenhouse Gas Initiative (RGGI)

Suggested Citation

  • Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2019. "Cost containment in pollution auctions," Discussion Papers Series 610, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:610
    as

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    File URL: https://economics.uq.edu.au/files/46405/610.pdf
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    References listed on IDEAS

    as
    1. Shobe, William & Holt, Charles & Huetteman, Thaddeus, 2014. "Elements of emission market design: An experimental analysis of California's market for greenhouse gas allowances," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 402-420.
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    11. Lana Friesen & Lata Gangadharan, 2013. "Environmental Markets: What Do We Learn From The Lab?," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 515-535, July.
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    More about this item

    Keywords

    multi-unit auction; uniform-price; supply reserve; pollution permits; experiment.;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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