Auction design for selling CO2 certificates

Duration 2010–2012

Institute Institute for Markets and Strategy

Department Department of Strategy and Innovation

Regina Betz (Zurich University of Applied Sciences and University of New South Wales), Sascha Schweitzer (University of Bayreuth), Stefan Seifert (University of Bayreuth)

As part of the worldwide efforts to reduce carbon emissions and the 2009 Copenhagen UN Climate Summit, the Australian Labor Party government began designing a carbon emission permit trading scheme. The plan was to require many industries to purchase permits for their carbon emissions. These permits would be valid for different years (2016, 2017, etc.), sold at public auction, and traded on the free market.

The experimental studies show that when carbon permits for different years are auctioned off, sequential auctions yield higher revenues and efficiency, and open auctions perform better than closed auctions for simultaneous auctions.

The research project sought to identify the optimal auction rules for selling carbon permits to companies and other permit users. It explored questions such as whether permits valid for different years should be sold at one large complex auction or separately in a sequence of smaller auctions, and whether auctions should be open (where bidders can see other participants’ bids) or closed. Laboratory experiments were designed to test the different auction mechanisms and observe their effect on revenues and efficiency. Artificial permit markets were created and real people were invited to participate and earn real money. The results showed that open auctions performed better than closed auctions when permits valid for different years were auctioned off simultaneously. This positive effect disappeared when permits for different years were auctioned off sequentially. Sequential auctions also yielded higher revenues for the state regardless of auction format.

The research findings informed the design of efficient carbon emission permit trading schemes and shaped the legislation for the “Australian Auction of Carbon Units.”

The research results illustrating the efficiency of sequential and open auctions in allocating carbon emission permits contributed to SDG 12 “Responsible Consumption and Production“ and SDG 13 “Climate Action.” The research findings were crucial in drafting legislation for the “Australian Auction of Carbon Units” which closely followed the researchers’ recommendations and was adopted into law by the Labor Government. The trading scheme was scheduled to start in late 2014, however the new Australian Coalition Government (elected in 2013) abolished the carbon pricing mechanism altogether, including permit auctions, in July 2014. It was replaced by a “direct action” emissions reduction fund, where money was invested into specific abatement technologies based on reduction proposals elicited by public tender. The effectiveness of this approach proved limited.

Experimental testing of different auction rules and designs to sell carbon permits for different years

Recommendations for designing carbon permit allocation auctions

Input in design of Australian carbon permit trading scheme