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Auctioning EU ETS allowances: An assessment of market manipulation from the perspective of Law and Economics

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We analyse whether Auction Regulation 1031/2010/EU under the EU ETS efficiently addresses market manipulation. Two strategies for manipulating the allowance auction market are considered, namely demand reduction and signalling. In the Auction Regulation the legislature has opted for the sealed-bid uniform-price auction. This auction-mechanism design addresses in-auction signalling, but does not eliminate all incentives for demand reduction. For this reason the legal framework should ensure efficient monitoring and enforcement with a view to preventing market abuse. However, we have observed several inefficiencies, due to (a) concurring competences of enforcement agents, (b) inconsistencies in the enforcement schedules, and (c) imbalances in the mix of public and private enforcement. As a whole, though, the framework is nuanced, with the result that some of the inefficiencies are likely to be addressed. We conclude that market abuse in EU ETS auctions could be prevented more efficiently through improving the legal enforcement structure.


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