Carbon Allowance Auction Design: An Assessment of Options for the U.S.

Abstract

Carbon allowance auctions are a component of existing and proposed regional cap-and-trade programs in the U.S. and are also included in recent bills in the U.S. Congress that would establish a national cap-and-trade program in the U.S. to regulate greenhouse gases (“carbon”). We discuss and evaluate the two leading candidates for the auction format for carbon allowance auctions: a uniform-price sealed-bid auction and an ascending-bid dynamic auction, either of which could be augmented with a “price collar” to ensure that the price of allowances is neither too high nor too low. We identify the primary trade-offs between these auction formats as applied to carbon allowance auctions and suggest auction design choices that address potential concerns about efficiency losses from collusion and other factors. We conclude that a uniform-price sealed-bid auction is more appropriate for the sale of carbon allowances than the other leading choices, in part because it offers increased robustness to collusion without significant sacrifice in terms of price discovery.