Breaking collusion in auctions through speculation: an experiment on CO2 emission permit market

The European Emission Trading Scheme (EU-ETS) has chosen to adopt an auctioning procedure to initially allocate CO2 emission permits. Free allocation of permits becomes an exception for the third phase (2013-2020) and firms have to buy all their permits on the market or via auctions. The ability of bidders to collude is a key concern about the design of the auction format. To counter the bidding ring, the auction can be open to bidders without compliance obligations (speculators). This paper aims at studying experimentally speculation as a collusion breaking device in two different auction mechanisms: the uniform price sealed bid auction and the ascending clock auction. Our results suggest that a uniform sealed bid auction open to speculators should be chosen from a revenue maximization point of view. In this mechanism, compliance agents are adopting an outbidding strategy toward speculators. This strategy significantly increases the seller’s revenue, compared to the more collusive clock auction. In this one, on the contrary, bidders accommodate speculators, letting them buy permits in the auction and buying their necessary permits on the secondary market. However, as opening the auction to speculators deteriorates efficiency, the regulator faces a trade-off
between these two objectives.