Permit market auctions with allowance reserves

This article investigates multi-unit uniform-price auctions with allowance reserves, where a fixed quantity of units is supplemented by an additional supply reserve. The reserve automatically releases units if a sufficiently high price is triggered. This mechanism is commonly used in pollution permit auctions. The main justification for implementing an allowance reserve is to assist in cost containment. We show-paradoxically-that incorporating an allowance reserve into a permit auction may increase the clearing price. This has implications for all major cap-and-trade markets, including the US Regional Greenhouse Gas Initiative.