۱- Introduction

۲- Theoretical models

۳- Experimental design

۴- Results

۵- Conclusion

References

Abstract

Market power in emissions trading has been extensively investigated because emerging markets for tradable emissions permits, such as the European Union’s Emissions Trading Scheme (ETS), can be dominated by relatively few large sellers or buyers. Previous studies on market power in emissions trading have assumed the existence of a subset of competitive players. However, a key feature of emissions trading markets is that emissions permits are often traded by a small number of large sellers and buyers. Using a laboratory experiment, our objective in this paper is to test the performance of an emissions trading market utilizing a double auction in a bilateral oligopoly. Our results suggest that the theoretical bilateral oligopoly models can better describe market outcomes of emissions trading. The effects of the slope of the marginal abatement cost function on market power in laboratory experiments are found to be consistent with those predicted by the theoretical bilateral oligopoly model. How market power is exercised depends on the curvature of the abatement cost function. If the marginal abatement cost function of buyers (sellers) is less steep than that of sellers (buyers), the price of permits is lower (higher) than that under perfect competition. This is because the market power of buyers (sellers) exceeds that of sellers (buyers). The price of permits is close to the perfect competitive price when all traders have the sameslope of the marginal abatement cost function.

Introduction 

Market power in emissions trading has been extensively investigated because emerging markets for tradable emissions permits, such as the European Union’s Emissions Trading Scheme (EU-ETS), can be dominated by relatively few large sellers or buyers. Haita (2014) noted that the number of bidders for the spot auction of the EU-ETS was never larger than 20 during the first half of 2013. Additionally, tradable permit schemes have been applied to address local environmental problems, such as water quality trade. In such schemes, the number of permit traders is limited because only a few players can join such localized markets. Previous studies have analyzed market power in the case of actual small markets (Doyle, Patterson, Chen, Schnier, & Yates, 2014; Yates, Doyle, Rigby, & Schnier, 2013). Based on this background, reducing market power in permit trading is an important policy issue. Previous studies on market power in emissions trading assume the existence of a subset of competitive players. However, a key feature of emissions trading markets is that emissions permits are often traded by a small number of large sellers and buyers.