In a post at Common Tragedies, Erica Meyers reports the release of an addendum from the RGGI auction design team that responds to certain of the comments filed in response to their earlier report. As she reports, “One of the more interesting findings is that ‘clock auctions’ may be more susceptible to explicit efforts to collude than sealed-bid formats.”
In my post on the initial RGGI auction design report, I concluded that while it presented “a thorough examination of the market design problem and a well-thought out justification for their final design proposal,” it nonetheless failed to address one critical issue. The report recommended quarterly auctions which each offered two “vintages” of the RGGI carbon emissions allowances, and the auction design proposal failed to account for the substitutability between the two vintages. (Follow the link for more detailed discussions.)
The substitutability could be readily addressed using an ascending price clock auction. Peter Cramton, who highlighted the substitutability issue in comments submitted to RGGI, urged use of the ascending price clock. In my post, I endorsed that recommendation, saying, “Simultaneous ascending clocks [are] becoming the industry standard for these sorts of market situations. … There is little doubt that such a design would do the job.”
So I was fascinated to learn that I could be wrong. In the addendum, the auction design group address three issues:
- the choice of auction design (clock versus sealed bid) and how this affects the efficiency of the auction and the ability of parties to collude,
- variations on design for clock auctions, and
- auctions that combine different vintages of allowances.
Among their findings: “In laboratory auctions with communication among participants, successful collusion is more effective in clock auctions than in discriminatory and uniform price auctions.” They elaborate on this finding in the addendum and cite some related work. Erica provides good coverage of this topic in her post, “The Potential For Collusion in Ascending Price Auctions.”
Because of the potential collusion issues, the auction designers suggest sticking with the sealed-bid auction design, but they do propose two changes in response to the comments filed. From their summary:
The New England and New York ISO proposal that allowance owners be able to offer allowances for sale in the RGGI auction has definite advantages. We have different suggestions about how this might be implemented. The uncertainty of supply that results can help reduce the potential of collusion.
Since RGGI allowances are bankable, a bid for a later vintage could be treated as a request to purchase either a later vintage or an earlier vintage, whichever is less expensive. Interpreting bids in this manner prevents a price inversion in which the uniform price for the later vintage is higher than the price for the earlier vintage, although theory suggests this price inversion is inefficient and would not occur in the secondary market. This addendum describes a simple procedure for combined vintage auctions that implements this idea.
This last point largely addresses the substitutability issue while keeping the simplicity of the sealed-bid market design.
Overall, the addendum suggests useful tweaks to the RGGI auction design.
(NOTE: In addition to the post cited above, I commented on RGGI auction design topics in “RGGI auction design comments available online,” and “RGGI picks uniform-price sealed-bid auction design.” Erica Meyers’ previous post on the RGGI auction design: “Combined Vintage Auctions For RGGI.”)