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  • e form of permit allocation may also aect 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 payos on other contracts, some parties may have the incentive and ability to distort these settlement prices by slamming the close or other means.

11

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 prot from such schemes are likely to be nan- cially solvent and therefore not immune to pun- ishment. us, conditions for ex post deterrence being ecient 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 benets.

E N E R G Y S E C U R I T Y I N I T I AT I V E

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