THE ROLE OF AUCTIONS FOR EMISSIONS TRADING

The document examines the economic rationale for auctioning emissions allowances in the EU ETS, arguing that free allocation distorts carbon price signals and creates windfall profits. It suggests that auctioning provides a more transparent framework for low-carbon investment and generates public revenue to support poor households and innovation. While acknowledging carbon leakage as a concern, the report asserts it affects only a narrow range of sectors and can be addressed through targeted State Aid or border adjustments rather than broad free allocation. For the power sector, the report finds no serious leakage concerns and recommends full auctioning. It proposes a simple auction design using single-round, sealed-bid auctions with a uniform market-clearing price.

• Free allowance allocation in the EU ETS distorts the carbon price signal necessary for efficient investment and consumption choices, whereas auctioning provides a robust policy framework that removes uncertainties regarding allocation rules.
• The use of free allocation has allowed some Member States to support carbon-intensive technologies, delaying the transition to low-carbon alternatives; auctioning would instead create a transparent market for innovation.
• Auctioning generates government revenue that can be used to mitigate the economic impact of high energy prices on poor households, whereas free allocation often results in windfall profits for financially strong companies, undermining public support.
• There are no serious carbon leakage concerns for the power generation sector in the EU-27, and evidence shows that carbon costs are passed through in liberalised electricity markets.
• Carbon leakage is not an economy-wide problem but is specific to individual activities; analysis in Germany and the UK indicates that only 1% to 2% of GDP is associated with activities facing significant cost increases from carbon pricing.
• To address leakage, the report suggests alternatives to free allocation, including direct compensation via State Aid for capital-intensive sectors and the use of border adjustments, though the latter requires an international approach to avoid hindering developing countries.
• The most effective auction design for the EU ETS would be single-round, sealed-bid auctions with a uniform market-clearing price, conducted at least monthly to ensure market transparency.

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-oct-exectutive-summary.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-oct-exectutive-summary.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-oct-exectutive-summary.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }