Price Discovery in Emissions Permit Auctions May 03, 2010 By William ShobeDallas BurtrawJacob GoereeCharles HoltErica MyersKaren Palmer Price Discovery in Emissions Permit Auctions Price Discovery in Emissions Permit Auctions Auctions are increasingly being used to allocate emissions allowances (“permits”) for cap and trade and common-pool resource management programs. These auctions create thick markets that can provide important information about changes in current market conditions. This paper reports a laboratory experiment in which half of the bidders experienced unannounced increases in their willingness to pay for permits. The focus is on the extent to which the predicted price increase due to the demand shift is reflected in sales prices under alternative auction formats. Price tracking is comparably good for uniform-price sealed-bid auctions and for multi-round clock auctions, with or without end-of-round information about excess demand. More price inertia is observed for “pay as bid” (discriminatory) auctions, especially for a continuous discriminatory format in which bids could be changed at will during a pre-specified time window, in part because “sniping” in the final moments blocked the full effect of the demand shock. Center for Economic and Policy Studies William Shobe Professor Shobe splits his time between the Batten School and UVa’s Weldon Cooper Center for Public Service, where he heads up the Center for Economic and Policy Studies. He also teaches a class in environmental economics for the UVa Economics Department. His current research includes emission market and auction design, environmental federalism, improved economic modeling of Virginia’s economy, state economic development incentives, and state economic forecasting. Read full bio Dallas Burtraw Jacob Goeree Charles Holt Erica Myers Karen Palmer Related Content William Shobe The Economic Impacts of Positive Feedbacks Resulting from Deforestation Research Forests can affect environmental conditions in ways that enhance their survival. This effect may contribute to a positive feedback whereby deforestation could degrade environmental conditions and inhibit forest re-establishment. Rethinking Environmental Federalism in a Warming World Research Climate change policy analysis has focused almost exclusively on national policy and even on harmonizing climate policies across countries, implicitly assuming that the harmonization of climate policies at the subnational level would be mandated or guaranteed. We argue that the design and implementation of climate policy in a federal union will diverge in important ways from policy design in a unitary government.