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Carbon Pricing and Resale in Emission Trading Systems

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  • Peyman Khezr

Abstract

Secondary markets and resale are integral components of all emission trading systems. Despite the justification for these secondary trades, such as unpredictable demand, they may encourage speculation and result in the misallocation of permits. In this paper, our aim is to underscore the importance of efficiency in the initial allocation mechanism and to explore how concerns leading to the establishment of secondary markets, such as uncertain demand, can be addressed through alternative means, such as frequent auctions. We demonstrate that the existence of a secondary market could lead to higher untruthful bids in the auction, further encouraging speculation and the accumulation of rent. Our results suggest that an inefficient initial allocation could enable speculators with no use value for the permits to bid in the auction and subsequently earn rents in secondary markets by trading these permits. Even if the secondary market operates efficiently, the resulting rent, which represents a potential loss of auction revenue, cannot be overlooked.

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  • Peyman Khezr, 2024. "Carbon Pricing and Resale in Emission Trading Systems," Papers 2407.07386, arXiv.org.
    • Handle: RePEc:arx:papers:2407.07386
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    References listed on IDEAS

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    7. Khezr, Peyman & MacKenzie, Ian A., 2021. "Revenue and efficiency in pollution permit allocation mechanisms," Energy Economics, Elsevier, vol. 93(C).
    8. Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2020. "Mind your Ps and Qs! An Experiment on Variable Allowance Supply in the US Regional Greenhouse Gas Initiative," Discussion Papers Series 618, School of Economics, University of Queensland, Australia.
    9. Khezr, Peyman & MacKenzie, Ian A., 2018. "Permit market auctions with allowance reserves," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 283-306.
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