Carbon auctions, energy markets & market power: An experimental analysis

- Laboratory simulation of joint energy-emissions market.
- Evaluates market power under collusion and real-world institutional features.
- Dominant firms can exercise market power to inflate energy prices.
- Dominant firms can exercise market power to suppress emissions prices.
- Supply withholding is an implicit demand reduction in the emissions market.

This paper provides an experimental analysis of a simultaneous energy-emissions market under conditions of market power. The experimental design employs real-world institutional features; including stochastic demand, permit banking, inter-temporal (multi-round) dynamics, a tightening cap, and resale. The results suggest that dominant firms can utilize energy-emissions market linkages to simultaneously inflate the price of energy and suppress the price of emissions allowances. Whereas under prior market designs, regulators were concerned with dominant firms exercising their market power over the emissions market to exclude rivals and manipulate the permit market by hoarding permits; the results of this paper suggest that this strategy is less profitable to dominant firms in contemporary auction-based markets than strategic capacity withholding in the energy market and associated demand reduction in the emissions market.