Event Recap: Emissions Markets, Power Markets and Market Power: An Experimental Approach

Nov. 12, 2012

On Monday, November 5, 2012 AEDE welcomed Noah Dormady, Assistant Professor in the John Glenn School of Public Affairs at The Ohio State University, to present his research titled “Emissions Markets, Power Markets and Market Power: An Experimental Approach” as part of the AEDE Seminar Series.

Dormady, who received his Ph.D. in Public Policy, Planning and Development from the Sol Price School of Public Policy at the University of Southern California, in Los Angeles, focuses on energy policy and environmental policy in his teaching and research, and in particular he aims to evaluate the interactions between deregulated power (electricity) markets and Coasian market-based emissions controls (cap and trade), specifically focusing on issues of market power and oligopolistic behavior.

In “Emissions Markets, Power Markets and Market Power: An Experimental Approach”, Dormady looks at the question of how will emerging auction-based emissions markets function within the context of today's deregulated auction-based energy markets? In examining this topic, Dormady conducted an experimental analysis of a joint energy-emissions market. Using students at the University of Southern California as experimental subjects, Dormady performed a series of laboratory tests to investigate a simultaneous multi-round energy-emissions market under a stylized market power scenario. He then investigated the data acquired at a variety of levels to test the degree to which dominant firms can utilize linkages that exist between these markets to inflate electricity prices and suppress emissions prices. In conducting his experimental analysis, Dormady controlled for a variety of real-world institutional features, including variable demand, permit banking, inter-temporal (multi-round) dynamics, a tightening cap, and resale.

Dormady found that the exercise of market power significantly increases electricity auction clearing prices without significantly increasing emissions auction clearing prices, and in some cases, even significantly suppresses them. Dormady concludes that 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. Further, the results suggest that dominant firms can utilize emissions-energy market linkages to inflate electricity prices without systematically inflating emissions prices, and in cases of peak electricity demand, suppress emissions prices. Firms that possess market power in these markets have a variety of strategies at their disposal with which to seek higher profits. Through his research, Dormady offers a test of real-world market dynamics that are more in-depth than any prior experimental analysis in the field.

November 13, 2012