The US SO2 auction : analysis and generalization

The new Acid Rain Program allows electric utilities all over the U.S. to trade sulfur dioxide emission permits. An annual discriminative and revenue-neutral auction is linked to this program. This innovative sulfur dioxide auction distributes 3% of the permits in circulation and takes place at the Chicago Board of Trade. Early results showed that the auction generated a clearing price signal lower than the market price. Now the auction price seems to be determined by the outside market price. Still, in the important starting phase, a non-discriminative auction design would probably have generated better price signals since potentially severe downward biases in both seller price offers and buyer bids are due to the discriminative feature of the EPA auction.