Breaking Collusion in Auctions through Speculation: An Experiment on CO2 Emission Permit Markets

Authors


  • Michel Mougeot and Florence Naegelen, CRESE University of Franche-Comte, Avenue de l’Observatoire Besançon 25030 cedex, France (michel.mougeot@univ-fcomte.fr, florence.naegelen@univ-fcomte.fr). Benjamin Pelloux and Jean-Louis Rullière, GATE, CNRS and University of Lyon, 93 chemin des Mouilles, 69130 Ecully, France (pelloux@gate.cnrs.fr, rulliere@gate.cnrs.fr). Benjamin Pelloux, CREED, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands (b.pelloux@uva.nl).

  • This research has been made possible by a financial support from the Mission Climat, Caisse des Dépôts, Paris, France. Any opinions, findings, and conclusions or recommendations in this material are those of the authors and do not necessarily reflect the views of the Mission Climat, Caisse des Dépôts. The authors are grateful to Anaïs Delbosc, Sylvain Boschetto, Sylvain Ferriol for the software and the technical assistance. They thank Jacob Goeree and Charles Holt, participants of the ESA 2009 American meeting in Tucson, two anonymous referees, and the editor of this review for their helpful comments. The remaining errors are the authors’ sole responsibility.

Abstract

The European Emission Trading Scheme (EU-ETS) has chosen to adopt an auctioning procedure to initially allocate CO2 emission permits. Free allocation of permits will become an exception for the third phase (2013–2020) and most firms will have to buy all their permits on the market or via auctions. The ability of bidders to collude is a key concern about the design of the auction format. To counter collusion, the auction can be open to bidders without compliance obligations (speculators). This paper aims at studying experimentally speculation as a collusion-breaking device in two different auction mechanisms: the uniform-price sealed-bid auction and the ascending clock auction. Our results suggest that a uniform sealed-bid auction open to speculators should be chosen from a revenue maximization point of view. In this mechanism, compliance agents adopt an aggressive strategy toward speculators. This strategy significantly increases the seller's revenue, compared to the more collusive clock auction. In the latter, on the contrary, bidders accommodate speculators, letting them buy permits in the auction and buying their necessary permits on the secondary market. However, as opening the auction to speculators deteriorates efficiency, the regulator faces a trade-off between these two objectives.

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