Market power in cap-and-trade auctions: A Monte Carlo approach

Recent greenhouse gas auctions have resulted in base level prices while remaining significantly concentrated. How do dominant firms receive such a large share of emissions allowances without bidding up the market price? This paper provides a Monte Carlo simulation analysis based on a contemporary re...

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Bibliographic Details
Published in:Energy policy 2013-11, Vol.62, p.788-797
Main Author: Dormady, Noah C.
Format: Article
Language:English
Subjects:
Air pollution
Air pollution caused by fuel industries
Applied sciences
Auctions
Cap-and-trade
computer software
Demand
Economic data
emissions
Emissions trading
Energy
Energy economics
Energy. Thermal use of fuels
Environment
environmental markets
Exact sciences and technology
Fossil fuels and derived products
Gas
General, economic and professional studies
General. Regulations. Norms. Economy
Greenhouse effect
Greenhouse gases
Market power
market prices
Markets
Monte Carlo method
Monte Carlo simulation
Pollution
Pollution control
Prices
Profits
Simulation
Software
Studies
U.S.A
United States
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Summary:Recent greenhouse gas auctions have resulted in base level prices while remaining significantly concentrated. How do dominant firms receive such a large share of emissions allowances without bidding up the market price? This paper provides a Monte Carlo simulation analysis based on a contemporary regional greenhouse gas market in the United States. It introduces a C# simulation software environment, Oligopsony 1.0 that simulates uniform-price emissions auctions in repeated iterations. The results of these simulations indicate that there can be significant non-linearities between profit and market power as exercised through strategic demand reduction. This analysis finds the optimum point of strategic demand reduction that enables firms to exploit these non-linearities. The use of auctions to distribute tradeable pollution rights to firms in heavily concentrated markets can have significant unintended consequences, as it can exacerbate the problems of market power that exist within those markets. •The theory of market power behavior in emissions auctions is furthered.•Monte Carlo simulation environment Oligopsony 1.0 is introduced.•Simulations provide analysis of optimum bids to exercise market power.•Significant non-linearities exist between profit and the exercise of market power.
ISSN:0301-4215
1873-6777
DOI:10.1016/j.enpol.2013.06.022