Uncertainty and speculators in an auction for emissions permits

Abstract

Auctions have become popular as means of allocating emissions permits in the emissions trading schemes developed around the world. Mostly, only a subset of the regulated polluters participate in these auctions along with speculators, creating a market with relatively few participants and, thus, incentive for strategic bidding. I characterize the bidding behavior of the polluters and the speculators, examining the effect of the latter on the profits of the former and on the auction outcome. It turns out that in addition to bidding for compliance, polluters also bid for speculation in the aftermarket. While the presence of the speculators forces the polluters to bid closer to their true valuations, it also creates a trade-off between increasing the revenue accrued to the regulator and reducing the profits of the auction-participating polluters. Nevertheless, the profits of the latter increase in the speculators' risk aversion.

Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion

“…Several other papers consider risk aversion(Baldursson and von der Fehr 2004;Colla et al 2012;Haita-Falah 2016) and ambiguity aversion(Quemin 2017) in permit markets. However, all of them have a different focus than we do.7 Beck and Kruse-Andersen (2018),Bocklet et al 2019, Bruninx et al (2018,Carlén et al (2019), Gerlagh et al 2019, Quemin and Trotignon (2019 andPerino and Willner (2017).…”