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					    Emission Allowance Auctions

               Peter Cramton
            University of Maryland
             29 November 2007




     Key attributes of allowances
•   Product is homogeneous, divisible good
•   Product will be actively traded
•   Market is unconcentrated
•   Downward sloping demand curves
Auction design: greenhouse gas
• Should the auction be static (sealed-bid)
  or dynamic?
• How are bidder preferences expressed
  (bid format)?
• What is the pricing rule?
• What is the information policy?
• How frequently are auctions conducted?
• How far in advance?




                US SO2 auction:
          Poor version of pay-as-bid auction:
            highest bid paid to lowest ask


        Price
                                 Supply (asks)



 Clearing price

                                              Demand (bids)

                                             Quantity
  Neither bids nor asks reflect marginal cost of abatement!
       Lessons from US SO2
• Auctions are robust
  – Even poor design worked OK, thanks to
    secondary market
• Enormous inertia in auction design
  – Poor format continues to be used today
  – Other examples: oil leases, treasury,
    spectrum
  – Get it right the first time!




   Leading auction candidates
• One static
• One dynamic
            Uniform-price auction
        Price
                          Supply



            P0
clearing price                       Demand
                                       (as bid)

                             Q0      Quantity




       Properties of uniform-price
  • Assign to those with highest values
  • Market price paid for quantity won
  • Can be price taker to assure win desired
    minimum
   Enhance uniform-price auction
    with dynamic implementation




             Ascending clock
    Price

                     Supply



        P0
                            Excess     Demand
Price                       demand
clock
                       Q0            Quantity
           Ascending-clock has
          additional advantages
• Price and assignment discovery
• Build desired portfolio of products
• Better manage budget constraints




             Other features
•   Internet auction
•   Intraround bids
•   Proxy bids if desired
•   Report excess demand
          Recent clock auctions
• EDF generation capacity (virtual power plants)
   – 24 quarterly auctions (Sep 2001 – present)
• Electrabel generation (virtual power plants)
   – 8 quarterly auctions (Dec 2003 – present)
• Ruhrgas gas release program
   – 5 annual auctions (2003 – present)
• Trinidad and Tobago spectrum auction
   – 1 auction (June 2005)
• Federal Aviation Administration airport slot auction
   – 1 demonstration auction (Feb 2005)
• UK emissions trading scheme
   – World’s first greenhouse gas auction (Mar 2002)
• GDF and Total gas release program
   – 4 auctions (Oct 2004)




          Recent clock auctions
• New Jersey basic generation service
   – 6 annual auctions (2002 – present)
• Texas electricity capacity
   – 16 quarterly auctions (Sep 2001 – present)
• Austrian gas release program
   – 3 annual auctions (2003 – present)
• Nuon generation capacity
   – 1 auction (September 2004)
EDF Virtual Power Plant

                    MDI
                  market design inc.




     Electrabel VPP
                    MDI
                  market design inc.
              Typical EDF auction
• Number of products
  – Two to four groups (baseload, peakload, etc.)
  – 20 products (various durations)
• Number of bidders
  – 30 bidders
  – 15 winners
• Duration
  – Eight to ten rounds (one day)
• €300 million in value transacted in auction




               Simultaneous clock
                   Price        Exact clearing
                           Round 6
                    P6
  Clearing Price                           Round 5
                    P5
                                                 Round 4
                    P4
                                                       Round 3
                    P3

                                                           Round 2
                    P2


                                                           Round 1
                    P1




                                                                        tons
                                 Supply              Aggregate Demand
                                     Clock auction (10 rounds)
                         14000



                         12000



                         10000
Price (Euros/MW/month)




                         8000



                         6000



                         4000



                         2000



                            0
                                 0     1000   2000   3000        4000   5000         6000          7000

                                                      Quantity (MW)




                                                                        Source: Armstrong et al. (2007)
                                 Source: Armstrong et al. (2007)




              Conclusion
• Uniform-price auction would suffice if
  auctioning a single product
• Ascending clock preferable if multiple
  products
• Details of clock auction are important