Fixed Price Auction: A Simple Truth Telling Carbon Pricing Mechanism

Abstract

This paper proposes a fixed price auction mechanism to overcome asymmetric information problem considering firms with heterogeneous emission abatement costs. When facing fixed price permit auction and emission trading market, firms will make trade-offs between buying permits at fixed price and buying permits from markets. Equilibrium results show that firms have enough incentives to tell the truth about their private emission cost information. The numerical simulation uses China’s real data to compare performances of fixed price auction scheme to pure price scheme and pure quantity scheme. Simulation results are consistent to theoretical predictions and fixed price auction scheme performs best among three schemes. This result gives quite important implication for China to build its national emission trading scheme.

Keywords: Fixed Price Auction, Carbon Pricing, Mechanism Design, Asymmetric Information, CGE

JEL Classification: C63, C68, D82, Q54, Q58