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Auctioning of EU ETS Phase II allowances: how and why?

Author

Listed:
  • Cameron Hepburn

    (Oxford University)

  • Michael Grubb

    (Cambridge University and Carbon Trust)

  • Karsten Neuhoff

    (Cambridge University)

  • Felix Matthes

    (Oeko Institute)

  • Maximilien Tse

    (Oxford University)

Abstract

The European Directive on the EU ETS allows governments to auction up to 10% of the allowances issued in Phase II 2008-2012, without constraints specified thereafter. This paper reviews and extends the long-standing debate about auctioning, in which economists have generally supported and industries opposed greater use of auctioning. The paper clarifies the key issues by reviewing six ‘traditional’ considerations, examines several credible options for auction design, and then proposes some new issues relevant to auctioning. It is concluded that greater auctioning in aggregate need not increase adverse competitiveness impacts, and could in some respects alleviate them, particularly by supporting border-tax adjustments. Auctioning within the 10% limit might also be used to dampen price volatility during 2008-12 and, in subsequent periods, it offers the prospect of supporting a long-term price signal to aid investor confidence. The former is only possible, however, if Member States are willing to coordinate their decision-making (though not revenue raising) powers in defining and implementing the intended pricing mechanisms.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Cameron Hepburn & Michael Grubb & Karsten Neuhoff & Felix Matthes & Maximilien Tse, 2006. "Auctioning of EU ETS Phase II allowances: how and why?," Working Papers EPRG 0621, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
  • Handle: RePEc:enp:wpaper:eprg0621
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    References listed on IDEAS

    as
    1. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
    2. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
    3. repec:reg:rpubli:59 is not listed on IDEAS
    4. Daniel Esty, 1994. "Greening the GATT: Trade, Environment, and the Future," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 40, December.
    5. Paul Klemperer, 2004. "Auctions: Theory and Practice," Online economics textbooks, SUNY-Oswego, Department of Economics, number auction1.
    6. Robin Smale & Murray Hartley & Cameron Hepburn & John Ward & Michael Grubb, 2006. "The impact of CO 2 emissions trading on firm profits and market prices," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 31-48, January.
    7. Jacoby, Henry D. & Ellerman, A. Denny, 2004. "The safety valve and climate policy," Energy Policy, Elsevier, vol. 32(4), pages 481-491, March.
    8. Pizer, William, 1997. "Prices vs. Quantities Revisited: The Case of Climate Change," Discussion Papers dp-98-02, Resources For the Future.
    9. Paul Klemperer, 2004. "Auctions: Theory and Practice," Online economics textbooks, SUNY-Oswego, Department of Economics, number auction1.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    European emission trading; auctions; price floor;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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