THE ROLE OF AUCTIONS FOR EMISSIONS TRADING

The report argues that auctioning emissions allowances in the EU ETS is superior to free allocation because it removes price signal distortions, prevents windfall profits, and generates public revenue for climate action and social compensation. While carbon leakage is a primary concern for a small number of energy-intensive manufacturing sub-sectors, the authors find that leakage in the power sector is unlikely due to limited interconnection capacity and long investment cycles. The report recommends a simple, high-frequency, uniform-price auction design and suggests that leakage be addressed through targeted State Aid or border adjustments rather than broad free allocation. Additionally, it highlights that auction revenues can mitigate the regressive nature of carbon pricing by supporting low-income households.

• Free allowance allocation in the EU ETS distorts carbon price signals for investment and consumption, creates uncertainties for low-carbon alternatives, and leads to windfall profits for financially strong companies.
• Auctioning is recommended as a more robust framework that ensures economical responses to climate policy, provides transparent incentives for innovation, and generates government revenue to support poor households and developing countries.
• Carbon leakage is not an economy-wide problem but is limited to a narrow range of sectors and products; in Germany and the UK, only 1% to 2% of GDP is associated with activities facing significant cost increases from carbon pricing.
• The power sector in the EU-27 faces no serious leakage concerns, and evidence shows that the full costs of carbon are passed through to wholesale prices in liberalised electricity markets regardless of whether allowances were allocated for free.
• The most effective auction design for the EU ETS is a single-round, sealed-bid auction with a uniform market-clearing price, conducted with high frequency (at least monthly).
• Carbon pricing is regressive, disproportionately affecting low-income households; however, auction revenues can be recycled via lump-sum payments, tax reductions, or energy efficiency measures to reverse this effect.
• Free allocation is an uncertain and often inefficient tool for preventing leakage; alternatives such as State Aid for capital-intensive investments or border adjustments for homogeneous commodities are proposed.
• Investment leakage is a more significant risk than operational leakage for capital-intensive sectors, whereas operational leakage is more relevant for less capital-intensive facilities.

APA

Neuhoff, K., Matthes, F. C., Betz, R., Dröge, S., Johnston, A., Kudelko, M., Löschel, A., Monjon, S., Mohr, L., Sato, M., & Suwala, W. (2008). THE ROLE OF AUCTIONS FOR EMISSIONS TRADING. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/role-of-auctions-09-oct-08final.pdf

Chicago

Neuhoff, Karsten, Felix Chr. Matthes, Regina Betz, Susanne Dröge, Angus Johnston, Mariusz Kudelko, Andreas Löschel, et al. THE ROLE OF AUCTIONS FOR EMISSIONS TRADING. Climate Strategies, 2008. https://climatestrategies.org/wp-content/uploads/2014/11/role-of-auctions-09-oct-08final.pdf.

Wikipedia

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BibTeX

@techreport{neuhoff2008role, author = {Neuhoff, Karsten and Matthes, Felix Chr. and Betz, Regina and Dröge, Susanne and Johnston, Angus and Kudelko, Mariusz and Löschel, Andreas and Monjon, Stéphanie and Mohr, Lennart and Sato, Misato and Suwala, Wojciech}, title = {{THE ROLE OF AUCTIONS FOR EMISSIONS TRADING}}, institution = {Climate Strategies}, year = {2008}, month = oct, url = {https://climatestrategies.org/wp-content/uploads/2014/11/role-of-auctions-09-oct-08final.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }