An Auction-Bargaining Model for Initial Emission Permits

Abstract

This paper studies the initial emission permits auction problem from the perspective of government’ activities. In the traditional auction models, the basic assumption is that the government, i.e., the auctioneer, only pursues the maximum economic revenue. In this paper, we consider a hybrid auction-bargaining model, which gives new insights on how the government’s economic and social goals effect the equilibrium strategies. For this model, we find a symmetric bidding strategy equilibrium for the firms in a sealed bid auction form, which is closely related to the classical results in the auction. Our most important finding is that, compared with the classical auction mechanism, the final trading price is based on not only firm’s bidding strategy, but also the application quality of emission permits in the energy consumption market. The results also show that this auction-bargaining mechanism can alleviate distortion by excessive allowance in initial emission permits auction market and promote the social goals in both auction market and consumption market.