RGGI Auction Design Research:Phase 1 Results
RGGI Stakeholder Meeting, New York City May 31, 2007
Dallas Burtraw, Karen Palmer; RFFCharlie Holt, Bill Shobe; Univ. of Virginia
Jacob Goeree; CalTech
Purpose
To provide the states participating in the Regional Greenhouse Gas Initiative (RGGI) with information that they will need to implement a successful auction of carbon allowances.
Key approach
Use economics laboratory experiments to test auction designs:Networked computers with student subjectsCarefully structured financial incentivesUsed in many auction design applications
FCC spectrum sales, U.S. treasury notes, SO22, NOx, irrigation reductions, timber, and others
Helpful in setting auction design details
Proposal
Phase 1: Literature ReviewAssessment of auction types
Phase 2: Specific performance and design
analysis
Phase 1 Experiments
Auction types:Sealed bid - pay as bid (‘discriminatory’)Sealed bid - uniform price for all winnersMulti-round clock auctions
English (increasing) Dutch (decreasing)English clock with ‘shootout’ round
Interaction with spot market
Stylized setting for experiments
Designed to capture key aspects of market
Simple enough to implement in the lab
Setup
Experimental sessions12 participants per ‘lab session’Univ. of Virginia student subjectsSubjects earn money by buying, trading, and
using allowancesEach subject acts as a firm with a capacity
to produce a productProduction requires that the firm use allowances
‘Low’ users need 1 allowance per capacity unit ‘High’ users need 2 allowances but have lower
production costs
Setup (cont.)
Production costs randomly distributed across ‘firms’Wide cost range (15 sessions), narrow (11 sess.)
Initial sessions run without secondary (spot) market and no banking
Price of product fixed and known Earnings equal price of product sold minus
production costs minus allowance costs
Measures of performance
Efficiency is high if allowances are purchased by firms with the highest value for allowances (results in lowest cost carbon abatement)
Revenue is high if the auction is competitive; firms are not able to collude to pay less than the market price
Session data
Results table
Summary Performance Measures Wide Cost Range
Sessions Narrow Cost
Range Sessions Revenue Efficiency Revenue Efficiency
Uniform Price 77 98 92 99 Discriminatory 76 99 87 99
Clock 71 96 91 100 Shot Clock 72 98 87 94
Dutch 75 99 92 99
Phase 1 Considerations
Revenues and efficiencyAccurate price discoveryLiquidity and price volatilityFairness and transparencyAdministrative costsSetting reservation price
Handling unsold allowances
Preliminary Recommendations
Format and FrequencyReservation PricesFutures MarketMiscellaneous
Format and Frequency
Auction formatMixed auction format
First auction for a vintage: English clock with shootout sealed-bid round
Subsequent auctions sealed-bid English clock enhances price
discoverySealed-bid: low cost, resistant to
collusion, commonly used
Format and Frequency
Define ‘vintage’ to coincide with the enforcement periodMinimize irrelevant differencesReduce transaction costsMaximize number of identical assets
Format and Frequency
Auction frequencyQuarterly throughout the vintageEnhances liquidityLess likely to disrupt spot marketReduced ability for ‘surprise
hoarding’
Reserve Prices
Set firm reserve priceVery important element of auction
designProtects against collusionMay help reduce volatility
Must be willing to have unsold allowances
Option: put unsold allowances in a ‘contingency bank’
Facilitating Futures Markets
Sell some allowances before vintage yearMay not be used before vintage year
Develop price signals about future scarcity
Help reduce risk on long-term investments
Miscellaneous
Allow broad participation in auctionAnyone who can financially qualifyThis enhances price discovery and
efficiencyEfforts to limit participation may be
difficult to enforce
Miscellaneous
Auctions should include binding financial assuranceEscrow, letters of credit, bond ratingNo bids for more than posted
assuranceBidders held responsible for bid
amounts
Questions?
Phase 2 Research
Impact of “non-compliance” entities in auction
Appropriate levels of information revelation Financial assurance and escrow requirements Bidding rules that deter collusion Establishing a credible reserve price
Rules for selling reserve allowances Discriminatory or uniform price sealed-bid
auctions Guidance on selling future allowances
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