Auctioning vs. Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information

Francisco Alvarez, Francisco J Andrr
2013 Social Science Research Network  
We present a model with a cap-and-trade system in which there is imperfect competition and some firm has market power. In this framework, we study the different implications, in terms of efficiency, of the system used for the initial allocation of permits, either an auction or grandfathering. We show that, if the firm with market power in the secondary market also holds such a power in the auction, then the auction always generates more abatement costs than a grandfathering system, but this is
more » ... ot the case if both firms act non-strategically in the auction. The main message is that the auction design matters in the sense that the chances that an auction may improve the grandfathering results or not crucially depends on whether the market power spills over to the auction or not. JEL CODES: D44, Q58, L13.
doi:10.2139/ssrn.2362888 fatcat:xlzou74c3jg4deolc22vfkjftq