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Auctioning emissions credits - Silver bullet or abyss? Requirements and options for auction design

Auctioning emissions credits - Silver bullet or abyss? Requirements and options for auction design

26 November 2007

When designing emissions trading schemes, the decision on allocation methods is a crucial element. After a long and controversial debate, the German government has now decided to introduce the auctioning of credits. Approximately nine percent of all allowances will be given out against payment in the second trading period (2008–2012). In 2008, rules for the German auctioning system are expected to be specified by a regulation. Environmental economists tend to support auctioning for reasons of efficiency while many politicians and the public mostly expect the reduction of unwanted distributional effects (“wind-fall-profits”).

Against this background, the Climate Talk on 26 of November discussed the expectations which are tied to the introduction of auctioning. The debate focused on issues of implementation, mainly addressing the question how auctioning can be designed to ensure economic efficiency as well as compliance with legal norms. The aim was to review pros and cons of different auctioning formats, including potential problems which could arise in the wake of practical implementation.

Three introductory presentations provided the basis for discussion: Dr. Felix Matthes (Öko-Institut) discussed the implications of auction design decisions from a economic perspective while Dr. Jochen Gebauer (Bundeskanzleramt) summarized the legal controversy. Finally, Dr. Henning Rentz (RWE) presented insights into the debate from the viewpoint of an electric utility.

During the discussion, broad support for auctioning allowances emerged. Participants highlighted the increase in efficiency of auctioning compared to grandfathering. From a legal perspective, the burden on companies appears justifiable, as long the auctioning design helps to avoid cases of hardship. Moreover, there was consensus that auctioning design should ensure transparent and market-friendly transaction, which – in the opinion of most panellists – includes harmonisation of auctioning rules on the European level.

The discussion also revealed a number of controversial questions which need to be resolved in the near future. For instance, it remains unclear how the auction revenue will be used. Participants suggested that at least a part of the income should be employed to fund climate policies. Other issues raised referred to the appropriate institution for organising the auction, to the eligibility of participants and the choice of an appropriate auction format. It was pointed out that the second trading period must be understood as a learning process, a step-by-step phase-in of auctioning on the way to a 100% auctioning system. However, discussion also showed that the introduction of complete auctioning in the third trading period remains controversial.

Eventually, discussion on these and other issues was carried on in a more informal setting in a nearby restaurant.

Freie Universität Berlin, Environmental Policy Research Centre (FFU), Germany
Dr. Felix Matthes (Oeko-Institut)
Dr. Jochen Gebauer (Federal Chancellery)
Dr. Henning Rentz (RWE)
26 November 2007
Berlin, Germany
Number of Participants