The Regional Greenhouse Gas Initiative (RGGI) announced today that the first allowance auction in the United States for a mandatory CO2 emissions reduction program will take place on September 10, 2008. A second auction will take place December 17, with quarterly auctions thereafter; the compliance period will begin January 1, 2009. The announcement indicated that the following companies had been tentatively selected via competitive procurement processes to work with RGGI on aspects of the program: World Energy Solutions, Inc., Perrin Quarles Associates, Inc., ICF International, and the Greenhouse Gas Management Institute.
RGGI separately announced the basic auction design features that the RGGI states have agreed upon. As my title disclosed, RGGI has chosen a single round, uniform-price, sealed-bid auction — the design recommended by the RGGI’s auction design experts. However, RGGI indicated that “flexibility will be retained to transition to a multiple-round, ascending-price auction format if necessary to address evolving market conditions,” an alternative supported by Peter Cramton, among others, in comments on the RGGI auction design recommendations.
In November I wrote (“RGGI auction design flaw“):
Cramton, in his report on behalf of the New England and New York power markets, recommends a simultaneous ascending clock auction design. Worth reading if you are into these kinds of issues. Simultaneous ascending clocks pretty much are, as Cramton describes them, becoming the industry standard for these sorts of market situations… There is little doubt that such a design would do the job.
My sense of the RGGI situation is that their design issue could be remedied with a much less drastic accommodation. A linked sealed-bid auction would allow bids for the future vintage to specify the premium, if any, which they would pay to receive the current vintage product. Permits could be allocated using a surplus-maximization rule, with a uniform clearing prices for each of the products.
Actually, there is just enough vagueness in the description of the auction as a “single round, uniform-price, sealed-bid auction” to permit the linking of two simultaneous sealed-bid auctions such that the appropriate substitutions between two vintages is permitted. But I suspect they’re playing it simple to start, and then they’ll watch the “evolving market conditions.”
The key substantive issue now is for them to know what to look for in the auctions, so they will recognize whether or not separate auctions are causing inefficient results. The most obvious indicator of a problem would be if an auction resulted in lower prices paid for the better good. (The auctions will offer both a current vintage permit and a future vintage permit, but because a current vintage permit can be used to satisfy future year compliance requirements — but not the reverse — the current permit is a strictly superior product.) With access to all bid data it would be possible to produce a more sophisticated analysis of the effects of the separate sealed bid auctions on market efficiency.
The RGGI announcement will likely add a little extra context to the discussions at Wednesday’s half-day seminar at Resources for the Future, “Managing Costs in a US GHG Trading Program.” If you can’t make it over to RFF, the event will be webcast beginning at 8:30 AM.
More details from the RGGI design features announcement:
Auction Structure and Format: Allowances will be made available for sale on a quarterly basis in lot sizes of 1,000 allowances. The initial auction will offer allowances through a single-round, uniform-price, sealed-bid auction format. While the goal is to maintain a consistent auction format, flexibility will be retained to transition to a multiple-round, ascending-price auction format if necessary to address evolving market conditions.
Allowance Sale Schedule: Allowances will be identified with a vintage corresponding to the allowance’s respective allocation year. All allowances made available for auction by states, for a respective compliance period, will be offered for sale prior to the end of that compliance period. Future allowance vintages will be made available for sale in a quantity up to 50-percent of their respective annual allocation, and such offerings may be for allowances extending up to four allocation years into the future.
Participation: All market participants will be eligible to participate in the initial auction, provided they meet applicable qualification requirements, which will include provision of financial security. Flexibility will be retained to limit participant eligibility in subsequent auctions. Auction rules will establish a total limit for the number of allowances that entities (e.g., an organization and its affiliates and/or agents) may purchase in a single auction, equivalent to 25-percent of the allowances offered for sale in any single auction.
Reserve Price: A reserve price of $1.86 per allowance will apply to the first auction. After the first auction, a reserve price will be in effect that is the higher of $1.86 per allowance, as adjusted annually from 2009 onward based on the Consumer Price Index, or 80-percent of the current market price of the particular RGGI allowance vintage being auctioned. A reserve price based on the current market price will only be used if representatives from participating states determine that there are sufficient, reliable market data available to establish a valid current market price. The reserve price will be made known to prospective auction participants prior to each auction.
Unsold Allowances: Any unsold allowances will be made available for sale in future auctions in which a reserve price based on the current market price is being used. In 2012, as part of the first program review envisioned in the December 2005 RGGI Memorandum of Understanding, a decision will be made by the participating states as to whether to retire any unsold allowances from the first compliance period, or to offer these allowances for sale in subsequent auctions during the second compliance period.
Notice of Auctions: A public notice of auction will be provided at least 45 days prior to each auction. Such notification will be posted on a publicly available RGGI auction web site and will be made available by states in accordance with any applicable state rules, regulations and/or administrative procedures.
Each auction notice will provide at a minimum: the date, time, and location of the auction, the categories of eligible bidders, any requirements established for qualified participants, the quantity of allowances to be auctioned, and all other relevant information and procedures necessary for prospective bidders to participate in such auction.
Monitoring: The participating states will retain a professional independent market monitor to monitor auctions and subsequent market activity. The independent monitor will observe the conduct of the auction qualification process and the conduct of the auction itself. Based on such monitoring, the independent monitor will provide the participating states with a timely report of whether the auction was conducted in accordance with the regulations established by participating states and the noticed procedures and requirements that apply to qualified auction participants.
Auction Results: Upon approval by the participating states of the auction outcome and upon payment in full by successful bidders to the respective participating states, each state shall transfer the corresponding CO2 allowances to each successful bidder’s applicable account in the CO2 allowance tracking system. States will retain full regulatory authority for transferring allowances from their respective state accounts to winning bidders, contingent on approval of auction results and financial settlement.
Within a reasonable period of time following each auction, the participating states shall publish on the RGGI auction website the auction clearing price and the total amount of allowances sold in such auction.
Related: The WSJ’s Environmental Capital blog discusses the RGGI announcement in the context of other greenhouse gas allowance markets.
Environmental Economics points out, via Grist, that the USEPA has released a report on economic impacts of the Lieberman-Warner Climate Security Act.