Auctioning of EU ETS phase II allowances: how and why?

Cameron Hepburn, Michael Grubb, Karsten Neuhoff, Felix Matthes, Maximilien Tse
2006 Climate Policy  
Auctioning in the EU ETS Key Findings Auctioning in general: is likely to increase the macroeconomic efficiency of the EU ETS and offers scope to partially address its distributional impacts will have negligible competitiveness impacts reduces the distortions associated with free allocation and is correspondingly more compatible with EU State Aid legislation will have a smaller impact on EU ETS prices than allocation cutbacks without auctioning will increase management attention and thus market
more » ... ion and thus market efficiency Auctioning may also provide a hedge against projection uncertainties, reduce price volatility, and increase investor stability. The recent EU ETS market collapse is a dramatic manifestation of uncertainty in emission projections. Reserving some allowances for periodic auctions: could assist transparency and liquidity; offers a potential price cushioning mechanism (as in US transmission auctions), to create a more stable EU ETS market; and might facilitate ex-ante agreed target price ranges, thereby increasing predictability for investors Auctioning poses no significant implementation difficulties either ascending-bid or sealed-bid auctions could be used and based upon extensive experience, for example with securities auctions should be open to as wide a group of bidders as possible the concerns of small bidders can be addressed, for example through reserves guaranteed at the strike price For the longer term (post 2012), auctioning could also: help protect industrial competitiveness by enabling WTO-compatible border-tax adjustments help provide a long-term carbon price signal by recycling revenue into carbon contracts Abstract The European Directive on the EU ETS allows governments to auction up to 10% of the allowances issued in Phase II 2008-2012, without constraints specified thereafter. This paper reviews and extends the long-standing debate about auctioning, in which economists have generally supported and industries opposed greater use of auctioning. The paper clarifies the key issues by reviewing six 'traditional' considerations, examines several credible options for auction design, and then proposes some new issues relevant to auctioning. It is concluded that greater auctioning in aggregate need not increase adverse competitiveness impacts, and could in some respects alleviate them, particularly by supporting border-tax adjustments. Auctioning within the 10% limit might also be used to dampen price volatility during 2008-12 and, in subsequent periods, it offers the prospect of supporting a long-term price signal to aid investor confidence. The former is only possible, however, if Member States are willing to coordinate their decision-making (though not revenue raising) powers in defining and implementing the intended pricing mechanisms.
doi:10.3763/cpol.2006.0608 fatcat:zjtrzpfrqzgllf2jh63swog4k4