Common Tragedies

Thoughts on Environmental Economics

Combined Vintage Auctions For RGGI

Posted by Erica Myers on March 19, 2008

On March 17, 2008 the Regional Greenhouse Gas Initiative Inc. announced that the first CO2 allowance auction will be held on September 10, 2008. They have decided to hold quarterly auctions with the second auction scheduled for December 18, 2008. The first compliance period will begin at the beginning of 2009.

September’s auction will be of great interest to policy makers world wide because RGGI will be the first cap and trade program to auction such a large portion of the allowances rather than giving them away for free. The proposed rule for the Phase 3 of the EU ETS is to auction all of the allowances starting in 2013.

RGGI inc. also announced that the format for the auction will be sealed-bid, single-round, uniform-price; the design recommended by RGGI’s auction experts. While the goal is to maintain a consistent auction format, RGGI inc. is retaining the flexibility to transition to a multi-round, ascending price auction format. The virtues of the sealed-bid, single-round, uniform price auction are that is simple to understand, and many industry people are familiar with it (wholesale electricity is sold in uniform price auctions). However, if there are two separate uniform-price sealed-bid auctions, there is nothing to prevent the price of the later vintage from exceeding that of the earlier vintage; a problem cited by Peter Cramton, among others. In a forthcoming addendum to the report, RGGI’s design experts address this concern by recommending a combined vintage auction based on the idea that allowances are bankable and a bid for a later vintage should be treated as a request to purchase either a later vintage or an earlier vintage, whichever is less expensive (The link will be provided when the addendum is posted). This is similar to what Mike Giberson recommended:

“A linked sealed-bid auction would allow bids for the future vintage to specify the premium, if any, which they would pay to receive the current vintage product. Permits could be allocated using a surplus-maximization rule, with a uniform clearing prices for each of the products.”

On the European side, auction experts have also recommended the use of a single-round, sealed-bid, uniform-price auction (auctioning_in_the_eu_ets_-_report.pdf. If RGGI were to successfully employ some kind of a combined vintage sealed-bid format, it may serve as an international example.

While a good auction design is important, a well functioning spot market is crucial for the success of RGGI. If the market is sending the right signals, the differences among many of the proposed auction designs become trivial.

2 Responses to “Combined Vintage Auctions For RGGI”

  1. […] future price over the next few months as more forward deals are done – and also to see how the auction design works in September, given the planned increased use of auctioning in the EU […]

  2. […] Tragedies takes a close look at RGGIs auction model for carbon emissions, which could serve as a national and international template. The Australians […]

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