The Role of Auctions in Emission Allowance Allocations for Greenhouse Gases

When designing a cap-and-trade program, one of the more controversial and challenging questions for policymakers is how, to whom, and for what purpose to distribute the emission allowances. Although the emission allocation method would not affect the environmental integrity of the cap-and-trade program, the selected allocation strategy could have considerable consequences. Using auctions as a distribution method could avoid certain concerns that are likely to occur if covered sources receive all (or most) of the allowances at no cost. Auction revenues offer a unique opportunity to reduce the overall costs of the emissions program. This book examines the options and considerations in the emission allowance allocation in a cap-and-trade program.