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Open Access Publications from the University of California

Auction design for the allocation of emission permits

  • Author(s): Sunnevåg, Kjell J.
  • et al.

To the extent that emission permits have been allocated using market mechanisms, this has been done using a sealed-bid auction design, typically with discriminatory price. Emission permits, being a homogenous good with a fixed supply within a certain period, can be allocated using an auction design which can be considered as a “share auction”, where the bidders receive fractional shares of the item at a sale price that equates the demand and supply of “shares”. Since marketable emission permits is an exclusive right where signals from competing bidders can refine own bid estimates, the ascending multi-round auction format has been recommended over the sealed bid format by several authors for the allocation of emissions permits. Basically, two “competing” designs have been recommended, i.e. the standard ascending-clock auction and an ascending-clock implementation of Vickrey-pricing. The purpose of this paper is to evaluate pros and cons of these two formats, particularly in a setting where the authorities wish to allocate exclusive rights, e.g. emission permits, efficiently, and where the allocation of these exclusive rights has consequences for the level of production as well as market shares.

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