Multi-round auctions in an emissions trading system considering firm bidding strategies and government regulations
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Multi-round auctions in an emissions trading system considering firm bidding strategies and government regulations Qunwei Wang 1
1
& Cheng Cheng & Dequn Zhou
1
Received: 3 August 2019 / Accepted: 13 August 2020/ # Springer Nature B.V. 2020
Abstract
The allocation of carbon emission rights via auctioning has gradually become an irreplaceable part of the emissions trading system. However, the efficiency of allocations suffers due to low and volatile auction-clearing prices, which cannot account for price discovery. Furthermore, the fixed cap lacks flexibility in emission trading systems. Therefore, this study proposes a multi-round auction model with a floating cap for carbon allocation, integrating firms’ bidding strategies during the auction cycle and the impact of governmental regulations. The results show that (1) compared with static auctions, multiround auctions can achieve a higher and more stable clearing price. (2) The mechanism provides flexibility for the distribution of profits and may encourage firms to participate in auctions. (3) Among all factors, the total supply of carbon emission permits and the economic environment more significantly influence the mechanism. Keywords Carbon emission permit allocation . Multi-round auction . Bidding strategies . Optimal total rounds . Governmental regulations
1 Introduction The impact of the currently increasing greenhouse gas emissions on global climate change has attracted attention from both governments and scholars around the world (Pal et al. 2016; Wang et al. 2018; Zhou et al. 2019). The emissions trading system (ETS) of the European Union (EU), introduced in 2005, demonstrated that carbon dioxide emissions can be effectively reduced via market mechanisms (Egenhofer 2007). Since then, ETS regimes have been established by other countries (USA, Canada, China, South Korea, and Japan), all of which
* Qunwei Wang [email protected]
1
College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing 211106, China
Mitigation and Adaptation Strategies for Global Change
can be seen as imitations of the EU ETS (Ellerman et al. 2010). In particular, a nationwide carbon trading system for China may become the largest ETS in the world. The rational allocation of carbon permits is critical for an effective operation of the carbon market (Zhang and Hao 2017). Free and non-gratuitous modes are the two main approaches for the allocation of allowances. Grandfathering, benchmarking, self-declaration, and auctions are the main allocation approaches in the design of China’s pilot studies and integrate local and industrial differences (Zhang et al. 2015). Several studies have explored both the advantages and disadvantages of various allocation rules. For example, benchmarking is conditioned on production; therefore, benchmarking protects production from leakage (Zetterberg 2014). In general, this auction method has a number of unique advantages over other methods. First, auctions can help to more reasonably allocate limited carbon emissions
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