The Evolution of Pollution Auctions

Abstract

This article traces the evolution of pollution auctions. The article examines how auction design began with an initially simple auction format and has progressed over time, focusing on auctions in three key pollution regulation programs: the EU Emissions Trading Scheme, the US Regional Greenhouse Gas Initiative, and the California Cap-and-Trade Program. In response to the unique characteristics of pollution regulation, which is aimed at achieving both cost containment and market participation, regulators have created novel and interesting auction designs. The article reviews the theoretical and experimental evidence concerning the outcomes of current auction programs and highlights unique design features of these regulatory systems that are fundamental to both their development and success. A key finding of the article is that even small changes in auction design can lead to significant differences in auction outcomes.