Essays on auction mechanisms and information in regulating pollution

Authors: Kimmo Ollikka

Publication: VATT Publications 66

Date: 15.4.2014


Environmental regulation often has to be designed using asymmetric and incomplete information. Polluting firms, for instance, are normally privately better informed than the regulator with regard to the costs of reducing their emissions. However, even regulated firms may not have accurate information about their own abatement costs. The regulator is eager to know this private information in order to implement the most efficient environmental policy given the information at hand. In this thesis, I study, among other things, how auction mechanisms can be used to incentivize firms to reveal their private information to the regulator.

One of the central questions in pollution control theory is whether a price instrument like an emission tax or a quantity instrument like tradeable permits is better in environmental or climate policy. In climate policy, emissions trading programs have been more popular both in Europe and the U.S. Also, auctions and in particular uniform price auction formats have been used as an initial allocation method in many trading programs.

In the first two essays of this thesis, I study two-stage mechanisms for controlling pollution. In the first stage, the regulator conducts a generalized multi-unit Vickrey auction in order to allocate emission permits to firms. More importantly, the auction mechanism aims to collect private information from regulated firms. In the second stage, the regulator implements a range of environmental policy instruments, in the light of the information from the auction.

In the first essay, the regulator uses either a constant price regulation or a program of tradeable permits with a fixed supply of permits. I show that firms have less incentive to bid sincerely in an auction when using a tax instrument compared to emissions trading.

In the second essay, the regulator implements a tradeable permits program in the second stage, where the permit supply is elastic in price. Moreover, the permit market suffers some frictions, which increase the costs of trading. I derive incentive compatibility conditions for firms to bid sincerely in the first-stage auction given the regulation in the second stage and the various information structures.

In the third essay, I compare the Vickrey and uniform price auction formats in allocations of emission allowances without an allowance resale market. Firms may collude and thus coordinate their bidding behavior in auctions. The Vickrey auction is efficient but the revenues decrease the more firms collude. However, the efficiency and revenues of uniform price auctions depend heavily on the coalition game and the structure of the market.

Main research themes: Environment, energy and climate policy

auctions climate policy emission limits emission trading environment environment policy instruments environmental aid environmental impacts environmental policy

ISBN: 978-952-274-109-7 (Nid.), 978-952-274-110-3 (PDF)

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