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Designing a double auction mechanism for the re-allocation of emission permits

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  • Jiasen Sun

    (Soochow University)

  • Guo Li

    (Beijing Institute of Technology
    Beijing Institute of Technology
    Sustainable Development Research Institute for Economy and Society of Beijing)

Abstract

This paper employs and extends the auction method for the re-allocation of emission permits (RAEP) at the China Beijing Environment Exchange (CBEE) to meet pollution reduction targets. An optimization method is first proposed to calculate the optimal production quantity and emission permit demand/supply volume for firms with high/low pollution abatement cost. Then, the double auction method is adopted and extended to construct the RAEP double auction mechanism based on the principle of maximizing the total social welfare utility. To further explain this auction method, three matching mechanisms are proposed. Each mechanism achieves a balance between supply and demand of emission permits. Finally, a computational analysis of the real CBEE case is used to verify both the validity and practicability of the mechanism. The results show that the extended auction method presented in this paper could effectively increase the number of traded participants, improve the auction transaction efficiency, and increase the utilities of trading participants, compared to the auction method currently used in the CBEE; the extended method is always applicable regardless of the size of the permit market; the method could effectively realize the incentive compatibility, thus encouraging each firm to provide a real bid price.

Suggested Citation

  • Jiasen Sun & Guo Li, 2020. "Designing a double auction mechanism for the re-allocation of emission permits," Annals of Operations Research, Springer, vol. 291(1), pages 847-874, August.
    • Handle: RePEc:spr:annopr:v:291:y:2020:i:1:d:10.1007_s10479-018-2826-y
    DOI: 10.1007/s10479-018-2826-y
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