An experimental analysis of auctioning emission allowances under a loose cap

William Shobe, Karen Palmer, Erica Myers, Charles Holt, Jacob Goeree, Dallas Burtraw

Research output: Contribution to journalArticlepeer-review


The direct sale of emission allowances by auction is an emerging characteristic of cap-andtrade programs. This study is motivated by the observation that all of the major implementations of cap-and-trade regulations for the control of air pollution have started with a generous allocation of allowances relative to recent emissions history, a situation we refer to as a "loose cap." Typically more stringent reductions are achieved in subsequent years of a program. We use an experimental setting to investigate the effects of a loose cap environment on a variety of auction types. We find that all auction formats studied are efficient in allocating emission allowances, but auction revenues tend to be lower relative to competitive benchmarks when the cap is loose. Regardless of whether the cap is tight or loose, the different auction formats tend to yield comparable revenues toward the end of a series of auctions. However, aggressive bidding behavior in initial discriminatory auctions yields higher revenues than in the other auction formats, a difference that disappears as bidders learn to adjust their bids closer to the cut-off that separates winning and losing bids.

Original languageEnglish (US)
Pages (from-to)162-175
Number of pages14
JournalAgricultural and Resource Economics Review
Issue number2
StatePublished - Apr 2010
Externally publishedYes


  • Allowance trading
  • Auction
  • Cap and trade
  • Carbon dioxide
  • Greenhouse gases
  • RGGI
  • Regional Greenhouse Gas Initiative

ASJC Scopus subject areas

  • Agronomy and Crop Science
  • Economics and Econometrics

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