Discussion Papers no. 213

"EPA's new emissions trading mechanism

A laboratory evaluation" : a comment

In the US tradable SO2 permit scheme 97.2 per cent of the permits are grandfathered annually to electricity utilities. The remaining 2.8 per cent are withheld and offered for sale at the Environmental Protection Agency (EPA) auction. Also, the electricity utilities may tender permits for sale both at this auction as well as on a complementary permit market. Cason and Plott [3] recommend that the EPA seriously consider reforming the present auction procedure for SO2 permit trading. They provide experimental evidence of downward biased auction prices that understate the marginal cost of emissions control. Our comparison with available empirical data shows that the complementary market for SO2 permits disciplines the auction inasmuch as the auction and market prices are not significantly dissimilar. This fact and the extent of conducted permit trade render improbable the assertion that the EPA auction price differs from the true marginal abatement cost. Hence, the policy relevance of the EPA auction's alleged faults may be negligible.

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