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Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative

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Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative Final Report · October 2007 Charles Holt William Shobe University of Virginia Dallas Burtraw Karen Palmer Resources for the Future Jacob Goeree California Institute of Technology Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative Final Report October 26, 2007 Investigators: Charles Holt, William Shobe University of Virginia Dallas Burtraw, Karen Palmer Resources for the Future Jacob Goeree California Institute of Technology Acknowledgements This report was funded by the New York State Energy Research Development Authority (NYSERDA). The research benefited from outstanding assistance from Erica Myers, Danny Kahn, Anthony Paul and Susie Chung at Resources for the Future and Lindsay Osco, Susan Ivey, Courtney Mallow, A.J. Bostian and Angela Smith at the University of Virginia. The authors want to express their appreciation to the many persons who provided comments and advice over the course of this investigation, especially to David Coup for project management along with many helpful insights, to NYSERDA’s Technical Advisory Group and to the RGGI Staff Working Group. Disclaimer The statements and recommendations in this report are solely the responsibility of the authors and do not necessarily represent the views of NYSERDA or the RGGI Staff Working Group or others associated with the RGGI. Obtaining Copies of This Report Copies of this report can be obtained from: www.rff.org or www.coopercenter.org/econ/rggi_final_report.pdf. For more information about RGGI, see www.rggi.org. 10/26/07 Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative Executive Summary ................................................................................................................ 5 Part 1: Motivation and Organization of the Project 1 Introduction..................................................................................................................... 10 1.1 Methods of Analysis ................................................................................................... 12 1.2 Two Phases of Research.............................................................................................. 13 1.3 Organization of this Report......................................................................................... 14 2 Background on Auction Types....................................................................................... 15 2.1 Introduction................................................................................................................. 15 2.2 Auction Formats.......................................................................................................... 16 3 Criteria for Selection of an Auction Type..................................................................... 21 4 Basic Experimental Approach for This Investigation ................................................. 24 4.1 Production Technology and Market Structure ............................................................ 25 4.2 Measures of Performance............................................................................................ 27 4.3 Important Aspects of Phase 1 Experiments ................................................................ 30 4.4 Important Aspects of Phase 2 Experiments ................................................................ 33 Part 2: Research Questions 5 Key Auction Design Features......................................................................................... 35 5.1 Defining Allowance Vintages..................................................................................... 35 5.2 Frequency, Timing, and Size of Auctions................................................................... 35 5.3 Financial Assurance Mechanisms............................................................................... 41 5.4 Market Monitoring...................................................................................................... 42 5.4.1 Guidance on Monitoring in RGGI .............................................................. 44 2 10/26/07 6 Auction Performance in Collusion-Enhancing Environments and How to Limit Collusion .......................................................................................................................... 45 6.1 Effects of a Loose Cap in Uniform-Price and Discriminatory-Price Auctions........... 46 6.1.1 Motivation................................................................................................... 46 6.1.2 Procedures................................................................................................... 48 6.1.3 Aggregate Results ....................................................................................... 48 6.2 Collusive Environment with Standard Caps ............................................................... 50 6.2.1 Motivation................................................................................................... 50 6.2.2 Procedures................................................................................................... 50 6.2.3 Aggregate Results ....................................................................................... 51 6.3 Discussion and Extensions.......................................................................................... 53 7 Reserve Prices and Price Volatility ............................................................................... 54 7.1 Price Volatility ............................................................................................................ 54 7.2 Reserve Prices ............................................................................................................. 55 8 Price Discovery................................................................................................................ 59 8.1 Price Discovery: Unanticipated Shift in the Demand for Permits .............................. 60 8.2 Relationship Between Auctions and Secondary (Spot) Markets ................................ 63 8.2.1 Experience in Existing Allowance Markets................................................ 64 8.2.2 Evidence From Experiments....................................................................... 66 9 Hoarding of Allowances.................................................................................................. 67 9.1 The Speculation and Market Manipulation Motives................................................... 71 9.2 The Market Disruption Motive ................................................................................... 72 9.3 The Competitive Advantage Motive........................................................................... 72 9.4 The External Compliance Motive ............................................................................... 73 9.5 Possible Approaches to Address Hoarding................................................................. 74 10 Combining Auctions with Free Allocations.................................................................. 75 Part 3: Recommendations 11 Recommendations for Auction Design.......................................................................... 77 Recommendation 1: Uniform-Price Auction .................................................................... 77 Recommendation 2: Single-Round, Sealed-Bid Format................................................... 77 3 10/26/07 Recommendation 3: Separate Auctions by Vintage.......................................................... 77 Recommendation 4: Quarterly Auctions........................................................................... 78 Recommendation 5: Auction Future Allowances in Advance.......................................... 78 Recommendation 6: Reserve Price ................................................................................... 78 Recommendation 7: Unsold Allowances.......................................................................... 79 Recommendation 8: Lot Size............................................................................................ 79 Recommendation 9: Open Auctions to All Qualified Bidders ......................................... 79 Recommendation 10: Bids are Binding Contracts............................................................ 79 Recommendation 11: Joint and Uniform Auction ............................................................ 80 Recommendation 12: Market Monitoring......................................................................... 80 Recommendation 13: Disclosure of Beneficial Ownership.............................................. 80 Recommendation 14: Auction Information Disclosure .................................................... 81 Recommendation 15: Statement of Intent......................................................................... 81 Recommendation 16: Ongoing Evaluation....................................................................... 81 12 References ........................................................................................................................ 82 13 Appendix A: Statement of Work Map .......................................................................... 86 14 Appendix B: Annotated Bibliography........................................................................... 87 4 10/26/07 Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative
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