Emissions Trading with Consignment Auctioning : A Lab-in-The-Field Experiment

With a unique opportunity of recruiting hundreds of emissions trading system (ETS) participants in a series of lab-in-the-field experiments, we compare the revenue-neutral consignment auction (CA) with the free allocation (grandfathering, GF hereafter) and uniform price auction (UPA) as an alternative permit allocation design. In our setup, firms first receive their permits for free, and then under the two auction mechanisms, they need to buy back a share of the permits with auction revenues returned to the firms (CA) or not (UPA) in the primary market, followed by a spot (secondary) market for all mechanisms with the continuous double auction. We find enforced permit transactions in the primary market induce a higher price, facilitating price discovery with lower volatility and more effective trading in the spot market. Both auctions reduce non-compliance compared with GF, as the auction makes both permit hoarding and risky over-selling less severe in the spot market. Both CA and UPA help smaller polluting firms lower their profit risks, and CA also helps large cleaner firms increase profits. Our results provide insights on permit allocation designs when introducing an ETS, especially for developing countries that ponder the balance between market efficiency and firms’ cost burden