e form of permit allocation may also aect vul-
nerability to squeezes. If permits are auctioned, the entire auctioned amount is in the oat at the time of the auction. In contrast, if permits are allocated to end-users directly, the oat will be smaller, per- haps dramatically so.11 us, the market is most vulnerable to market power manipulation when permits are allocated rather than auctioned. e market is least vulnerable to manipulation when permits are auctioned relatively frequently.
e other types of manipulation, such as slam-
ming the close or the spreading of false informa- tion may also occur in carbon markets. In par- ticular, if exchanges introduce carbon futures contracts, and settlement prices of these contracts are utilized to determine the payos on other contracts, some parties may have the incentive and ability to distort these settlement prices by slamming the close or other means.
For a broader discussion of permit allocation, see Morris (2009).
As noted in section 3 above, these abuses are best deterred ex post, rather than through the use of position limits, or by attempting to intervene in the market while a manipulation appears to be in progress. ese manipulations will leave distinc- tive evidence in the form of characteristic price distortions. Moreover, the parties that could prot from such schemes are likely to be nan- cially solvent and therefore not immune to pun- ishment. us, conditions for ex post deterrence being ecient hold in carbon markets, and pub- lic policy should be directed towards strengthen- ing it.
My skepticism about the likelihood that “exces- sive” speculation distorts the prices of other com- modities extends to carbon derivatives markets.
us, measures to constrain it will almost certain-
ly impose costs on market users without produc- ing any corresponding benets.
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