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Auction Design and the Market for Sulfur Dioxide Emissions

Paul L. Joskow, Richard Schmalensee, and Elizabeth M. Bailey

August 1996

Paul L. Joskow, Richard Schmalensee, and Elizabeth M. Bailey, August 1996

Title IV of the Clean Air Act Amendments of 1990 created a market for electric utility emissions of sulfur dioxide (SO2). Recent papers have argued that flaws in the design of the auctions that are part of this market have adversely affected its performance. These papers incorrectly assume that trade can only occur at auctions, however. Our empirical analysis of the SO2 emissions market shows that the auctions have become a small part of a relatively efficient market and that the auction design problems that have attracted the most attention have had no effect on actual market prices.

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