Consignment auctions

This article investigates the allocation of pollution permits using a consignment auction. In a consignment auction process, firms are initially endowed with permits for free but must consign these permits to the auction for sale. Firms bid in the auction, pay for the permits they receive, and obtain a revenue for their consigned permits sold at auction. This approach has been advocated as a politically viable mechanism that ensures a clear price signal for the market. We show, in contrast, that in the auction equilibrium each firm demands their initial endowment of permits and, consequently, their payoff is independent of the clearing price: a consignment auction does not provide a clear price signal. Our results have policy implications for the California Cap-and-Trade Program.