Emissions Markets, Power Markets and Market Power: An Experimental Analysis
Photo Credit: John Glenn School of Public AffairsNoah Dormady, Assistant Professor in the John Glenn School of Public Affairs at The Ohio State University, will present as part of the AEDE Seminar Series on November 5th in Room 105 of the Agricultural Administration Building (2120 Fyffe Road). His presentation will focus on "Emissions Markets, Power Markets and Market Power: An Experimental Analysis." This research was presented at the Association of Environmental and Resource Economics sessions at the Western Economic Association in San Francisco, CA in the summer of 2012.
Abstract: How will emerging auction-based emissions markets function within the context of today’s deregulated auction-based energy markets? This paper provides an experimental analysis of a joint energy-emissions market. The impact of market power and collusion among dominant firms is evaluated to determine the extent to which an auction-based tradeable permit market influences performance in an adjacent energy market. The experimental treatment design controls for a variety of real-world institutional features, including variable demand, permit banking, inter-temporal (multi-round) dynamics, a tightening cap, and resale. Results suggest that the exercise of market power significantly increases energy auction clearing prices, without significantly increasing emissions auction clearing prices, and in some cases, even significantly suppresses them. The institution of auction-based carbon markets in the already-concentrated energy sector can further strengthen the market position of dominant firms who can leverage energy-emissions market linkages to their operational advantage.
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