Experimental evidence on the performance of emission trading schemes in the presence of an active secondary market

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Abstract:

As auction based emission trading schemes (ETS) become more common in addressing climate change, it is of interest to study the effects of bargaining power in resale markets on original as well as post-resale allowance allocations in terms of prices and efficiency. This article provides an experimental study of first price private value asymmetric auctions followed by a -double auction resale market opportunity. We compare the -double auction to other resale regimes with an uneven distribution of market power and contrast initial bids, resale prices and efficiency. Despite the conventional wisdom that full efficiency requires the absence of market power, we find that -double auction resale markets lead to lower efficiency than the monopsony resale regime. The level of efficiency achieved, however, is close to the highest across mechanisms that have differential bargaining power at the resale stage.

Keywords: C92; D44; bargaining power; efficiency; emission trading schemes; resale markets

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2013.857128

Affiliations: 1: Department of Economics and International Business, University of Central Oklahoma, Edmond, OK, 73034, USA 2: National Science Foundation, Arlington, VA, 22230, USA

Publication date: February 11, 2014

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