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Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative

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Abstract

This report develops recommendations on the most appropriate design for auctions of Regional Greenhouse Gas Initiative (RGGI) CO2 allowances. The research was conducted in two phases. Phase 1 included the initial preparation of an annotated bibliography and a round of experiments to investigate the performance of a number of auction types considered to be likely candidates for use in a CO2 allowance auction. The main auction types considered were the sealed-bid, increasing-price sequential (English clock), and decreasing-price sequential (Dutch) auction forms. We also examined whether sealed-bid auctions should use the pay-as-bid (discriminatory) or uniform-price rules. Phase 2 experiments examined auction performance for expanded set of performance measures and in a richer institutional setting. The auction formats were compared with respect to price discovery, that is, ensuring that the price of allowances at auction reflects their market value, and in limiting collusive behavior. We also examined the effect of reserve prices and allowance banking and did more analysis of how the auction combines with secondary (or spot) markets. We looked at the effects of allowing participation in the auction by brokers or other traders not needing allowances for compliance and of combining auctions with “grandfathering” of some allowances for free to generators. In addition, we performed some experiments to look at so-called “hoarding behavior” and the effects of different mechanisms that have been proposed to limit hoarding. In particular, our experiments examined whether holding auctions with participation limited to generators can reduce the effect of hoarding behavior.

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File URL: http://econ.ccps.virginia.edu/RePEc_docs/ceps_docs/rggi_auction_final.pdf
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File URL: http://econ.ccps.virginia.edu/RePEc_docs/ceps_docs/Auction_Design_Addendum_April08.pdf
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Bibliographic Info

Paper provided by Center for Economic and Policy Studies in its series Reports with number 2007-03.

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Length: 131 pages
Date of creation: 15 Oct 2007
Date of revision:
Handle: RePEc:vac:report:rpt07-03

Note: Research conducted for the New York State Energy Research and Development Authority The additional file is an addendum to the report delivered in April 2008.
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Keywords: climate change; allowance; carbon dioxide; co2; RGGI; emission markets;

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References

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  1. Jacob K. Goeree & Theo Offerman, 2000. "Efficiency in Auctions with Private and Common Values: An Experimental Study," Virginia Economics Online Papers 347, University of Virginia, Department of Economics.
  2. Jehiel, Philippe & Moldovanu, Benny, 2001. "Efficient Design with Interdependent Valuations," Econometrica, Econometric Society, vol. 69(5), pages 1237-59, September.
  3. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Cowles Foundation Discussion Papers 1421, Cowles Foundation for Research in Economics, Yale University.
  4. Eric Maskin, 2001. "Auctions and Efficiency," Economics Working Papers 0002, Institute for Advanced Study, School of Social Science.
  5. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," NBER Working Papers 12126, National Bureau of Economic Research, Inc.
  6. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Carine Staropoli & Céline Jullien, 2006. "Using Laboratory Experiments To Design Efficient Market Institutions: The Case Of Wholesale Electricity Markets," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 555-577, December.
  8. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-29, September.
  9. Paarsch, Harry J., 1992. "Deciding between the common and private value paradigms in empirical models of auctions," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 191-215.
  10. Subir Bose & George Deltas, 2007. "Exclusive Versus Non-exclusive Dealing in Auctions with Resale," Economic Theory, Springer, vol. 31(1), pages 1-17, April.
  11. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  12. Avery, Christopher, 1998. "Strategic Jump Bidding in English Auctions," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 185-210, April.
  13. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  14. Lucking-Reiley, David, 2000. "Auctions on the Internet: What's Being Auctioned, and How?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 227-52, September.
  15. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
  16. Zheng, Charles Zhoucheng, 2002. "Optimal Auction with Resale," Staff General Research Papers 12664, Iowa State University, Department of Economics.
  17. Ángel Hernando Veciana & Fabio Michelucci, 2008. "Second Best Efficiency in Auctions," Working Papers. Serie AD 2008-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  18. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  19. Andrew Muller, R. & Mestelman, Stuart & Spraggon, John & Godby, Rob, 2002. "Can Double Auctions Control Monopoly and Monopsony Power in Emissions Trading Markets?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 70-92, July.
  20. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September.
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