Journal Article

Carbon Allowance Auction Design: An Assessment of Options for the United States

Giuseppe Lopomo, Leslie M. Marx, David McAdams and Brian Murray

in Review of Environmental Economics and Policy

Published on behalf of Association of Environmental and Resource Economists

Volume 5, issue 1, pages 25-43
Published in print January 2011 | ISSN: 1750-6816
Published online May 2011 | e-ISSN: 1750-6824 | DOI: https://dx.doi.org/10.1093/reep/req024
Carbon Allowance Auction Design: An Assessment of Options for the United States

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Carbon allowance auctions are a component of existing and proposed regional cap-and-trade programs in the United States and are also included in recent proposed bills in the U.S. Congress that would establish a national cap-and-trade program to regulate greenhouse gases (“carbon”). We discuss and evaluate the two leading candidates for auction format: a uniform-price sealed-bid auction and an ascending-bid dynamic auction, either of which could be augmented with a “price collar” to ensure that the price of allowances is neither too high nor too low. We identify the primary trade-offs between these two formats as applied to carbon allowance auctions and suggest additional auction design features that address potential concerns about efficiency losses from collusion and other factors. We conclude that, based on currently available evidence, a uniform-price sealed-bid auction is more appropriate for the sale of carbon allowances than the other leading auction formats, in part because it offers increased robustness to collusion without significant sacrifice of price discovery.

Keywords: D44; H23; P48

Journal Article.  8683 words. 

Subjects: Other Economic Systems ; Taxation, Subsidies, and Revenue ; Market Structure and Pricing

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