Experimental comparison of impact of auction format on carbon allowance market

Abstract

Carbon allowances auctions are a good way to achieve the carbon allowance allocations under international agreements to address global climate change. Based on an economic experiment, this paper compares three possible carbon allowance auction formats (uniform price auction, discriminatory price auction and English clock auction) with heterogeneous bidders (coal power plants and gas power plants) from four perspectives (carbon price, auction efficiency, demand withholding and fluctuations in power supplies). Possibilities of collusion among bidders and impacts of allowance banking and penalty price on bidders’ behaviors under different auction formats are also examined. The results show that (1) when there are relatively more bidders and there are no obvious communications between them, despite there being some tacit collusion, efficiency of English clock auction is greater than the other two formats; (2) when there are relatively fewer bidders and there are obvious communications between them, explicit collusions are observed under English clock auction. In this case, discriminatory price auction helps prevent collusion to some extents; (3) in the banking scenario, more speculations are observed, while penalty price exacerbates price volatility.