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Report to the Chairman, Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

February 2010: 

Climate Change: 

Observations on Options for Selling Emissions Allowances in a Cap-and- 
Trade Program: 


GAO Highlights: 

Highlights of GAO-10-377, a report to the Chairman, Senate Committee 
on Finance, U.S. Senate. 

Why GAO Did This Study: 

Congress is considering proposals for market-based programs to limit 
greenhouse gas emissions. Many proposals involve creating a cap-and-
trade program, in which an overall emissions cap is set and entities 
covered by the program must hold tradable permits-—or “allowances”—-to 
cover their emissions. According to the Congressional Budget Office 
(CBO), the value of these allowances could total $300 billion annually 
by 2020. The government could either sell the allowances, give them 
away for free, or some combination of the two. 

Some existing cap-and-trade programs have experience selling 
allowances. For example, member states participating in the European 
Union’s (EU) Emissions Trading Scheme (ETS) have sold up to about 9 
percent of their allowances, and the amount of auctioning is expected 
to increase significantly starting in 2013. In the United States, the 
10 northeastern states participating in the Regional Greenhouse Gas 
Initiative (RGGI) have auctioned about 87 percent of their allowances. 

This report is part of GAO’s response to a request to review climate 
change policy options. This report describes the implications of 
different methods for selling allowances, given available information 
and the experiences of selected programs. GAO reviewed relevant 
literature and interviewed program officials from the EU and RGGI, 
economists, and other researchers. This report contains no 

What GAO Found: 

The method of selling emissions allowances can have significant 
implications for a cap-and-trade program’s outcomes, and therefore, it 
is important that the method be chosen based on well-defined goals. 
Goals often cited by program officials and economists include: 
maintaining simplicity and transparency, maximizing participation, 
promoting economic efficiency, generating a price that reflects the 
marginal cost of reducing emissions, avoiding market manipulation, 
raising revenues, and minimizing administrative costs. According to 
program officials, it is important to identify goals prior to choosing 
a sales method, as tradeoffs may exist. Some goals may also be 
interrelated—for example, a simple and transparent design may boost 
participation and reduce the risk of market manipulation. 

Once goals are identified, policymakers face a number of choices 
regarding the design of a sales mechanism. Existing programs have used 
different mechanisms to sell allowances, including direct sales 
through exchanges and auctions. EU officials described exchange-based 
sales as effective and easy to implement, although they and other 
economists questioned whether this approach would be suitable for 
selling a high volume of allowances. Program officials also reported 
that auctions, the more commonly used sales mechanism in the EU and 
RGGI, effectively distributed allowances to program participants. 
However, some economists noted that auctions are not "one size fits 
all," and should be designed to take into account market 
characteristics, such as the number of potential buyers. 

Using auctions to sell allowances would entail a number of other 
design choices. For example, policymakers could decide to utilize 
existing auction infrastructure, such as that used in exchanges or 
government auctions, or develop a new platform. Choices must also be 
made regarding the auction format and other design elements. 

* Auction format: The auction format determines, among other things, 
the price that winning bidders pay for allowances and the number of 
bidding rounds. To date, ETS and RGGI auctions have used a single 
round format in which each participant that bids above a certain price 
receives allowances at that price. Program officials expressed general 
satisfaction with this format, and economists noted that its relative 
simplicity may encourage participation. However, some economists also 
recommended that policymakers consider other formats as well, such as 
multiple-round auctions, given that experience with large-scale 
allowance auctions has been limited to date. 

* Other auction design elements: Apart from the auction format, other 
elements may affect outcomes, including: participation requirements, 
the frequency and timing of auctions, measures that establish lower or 
upper limits on allowance prices, and rules governing auction 
monitoring and the reporting of results. 

View [hyperlink,] or key 
components. For more information, contact John B. Stephenson at (202) 
512-3841 or 

[End of section] 




The Method of Selling Allowances in a Cap-and-Trade Program Can 
Influence Program Outcomes: 

Appendix I: Scope and Methodology: 

Appendix II: Other Elements of Auction Design: 

Appendix III: Allowance Sales Conducted in the EU ETS and RGGI: 

Appendix IV: GAO Contact and Staff Acknowledgments: 


Table 1: A Hypothetical Uniform-price Auction of 10 Allowances: 

Table 2: Allowance Sales in the EU Emissions Trading Scheme as of 

Table 3: Auctions Held in the Regional Greenhouse Gas Initiative 


Figure 1: Participant's Bidding Screen, RGGI Uniform-Price, Single- 
Round Auction: 


CBO: Congressional Budget Office: 

CRS: Congressional Research Service: 

ETS: Emissions Trading Scheme: 

EU: European Union: 

GDP: Gross Domestic Product: 

NAP: National Allocation Plans: 

OECD: Organisation for Economic Co-operation and Development: 

PPP: Purchasing Power Parities: 

RGGI: Regional Greenhouse Gas Initiative: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

February 24, 2010: 

The Honorable Max Baucus:
Committee on Finance:
United States Senate: 

Dear Mr. Chairman: 

Concerns about the effects of climate change have led the Congress to 
consider legislation that would limit emissions of greenhouse gases 
nationwide. Elevated concentrations of greenhouse gases in the 
atmosphere as a result of human activities could increase global 
temperatures and affect ecosystems, agricultural production, 
infrastructure, and human health. Among greenhouse gases produced by 
human activity, carbon dioxide is emitted in by far the largest 
volume, mostly as a result of the combustion of fossil fuels for 
electricity, transportation, and industrial processes.[Footnote 1] 
Many of the legislative proposals to limit greenhouse gas emissions 
would create a cap-and-trade program under which the government would 
place an overall cap on emissions and issue tradable permits. Entities 
covered by the program would have to surrender enough permits for all 
of their emissions at the end of specified time periods. Depending on 
the program, these "covered entities" may include power plants, oil 
refineries, and other manufacturing facilities. Each permit--known as 
an "allowance"--would represent a set quantity of greenhouse gas 
emissions, such as one metric ton.[Footnote 2] Allowances could be 
purchased and sold, creating a market in which the price of emissions 
fluctuates with supply and demand. 

As we testified in August 2009, the government has two main options 
for distributing allowances, the value of which could total hundreds 
of billions of dollars annually by 2020.[Footnote 3] One option is to 
give allowances away for free, which would transfer their value to 
recipients and may compensate covered entities for costs incurred as a 
result of the program. Another option is to sell allowances, which 
would generate revenue that could be distributed in a number of ways-- 
for example, tax cuts that improve economic efficiency or lump sum 
rebates to consumers. Selling allowances could also discourage efforts 
to gain free allowances through lobbying or other activities and help 
ensure that the price of emissions is the same for both new entrants 
and existing entities.[Footnote 4] As a result, many experts we 
interviewed for a previous report suggested that a cap-and-trade 
program should maximize the share of allowances sold.[Footnote 5] 
Existing cap-and-trade programs that regulate greenhouse gases have 
used two principal methods to sell allowances--sales on an exchange 
and auctions--and their experiences with these methods may offer 
valuable lessons as Congress considers establishing a cap-and-trade 
program.[Footnote 6] 

This report is one of four responding to your request for information 
on climate change policy options.[Footnote 7] Our objective was to 
describe the implications of different options for selling emissions 
allowances in a cap-and-trade program, given available information and 
the experiences of selected programs. To address this objective, we 
reviewed and analyzed academic and professional literature produced by 
research organizations, academic institutions, environmental groups, 
and industry associations, including international research. We also 
analyzed information on two cap-and-trade programs that have sold 
allowances--the European Union's (EU) Emissions Trading Scheme (ETS) 
and the Regional Greenhouse Gas Initiative (RGGI), an initiative of 10 
U.S. Northeast and Mid-Atlantic states. We collected information on 
these programs from EU member state officials, European Commission 
officials, RGGI program officials, academic literature, and research 
organizations. In addition to interviewing officials involved with 
RGGI auctions, we selected a nonprobability sample of five EU member 
states--Austria, Denmark, Germany, Ireland, and the United Kingdom--
for in-depth study, based on a review of background literature and 
interviews with knowledgeable officials. This sample enabled us to 
assess allowance sales that exhibited variation in several key areas: 
the size of the allowance market, the share of allowances auctioned, 
the design of the sale, and the amount of revenue generated. While the 
sample allowed us to learn about many important aspects of, and 
variations in, the design of allowance sales, it was not intended to 
provide findings that would be generalizable to all allowance sales. 
We also met with ETS officials and other stakeholders to discuss 
allowance sales methods used in individual EU member states as well as 
preparations for future large-scale auctions.[Footnote 8] Appendix I 
provides a more detailed description of our scope and methodology. 

We conducted our work from December 2008 to February 2010 in 
accordance with all sections of GAO's Quality Assurance Framework that 
are relevant to our objectives. The framework requires that we plan 
and perform the engagement to obtain sufficient and appropriate 
evidence to meet our stated objectives and discuss any limitations in 
our work. We believe that the information and data obtained, and the 
analysis conducted, provide a reasonable basis for any findings and 
conclusions in this product. 


Existing cap-and-trade programs that regulate greenhouse gases, such 
as the EU ETS, have experience in the sale of allowances. As we 
reported in November 2008, the ETS began the first of its trading 
periods, or "phases," in 2005.[Footnote 9] In Phase I, which ran from 
2005 to 2007, member states were allowed to auction up to 5 percent of 
their allowances, with the remainder distributed to covered entities 
free of charge. The auctioning limit increased to 10 percent in Phase 
II, which is to run from 2008 to 2012. The EU's decentralized approach 
gives member states the authority to design and execute their own 
sales. While some member states chose to sell or auction a portion of 
their allowances in Phases I and II, the quantity sold has been a 
relatively small percentage of the overall quantity of allowances 
distributed (see appendix III for more information).[Footnote 10] For 
Phase III, which begins in 2013, the EU decided to increase the amount 
of auctioning significantly, and as a result approximately half of all 
the allowances will be auctioned.[Footnote 11] The EU is currently 
assessing various auction design options for Phase III and beyond--
including holding centralized, EU-wide auctions--and plans to adopt an 
official auctioning regulation by June 2010.[Footnote 12] 

U.S. programs also offer experience in emissions allowance auctions. 
The federal government has auctioned allowances for the emission of 
sulfur dioxide under its Acid Rain Program since 1993, and the 
Commonwealth of Virginia auctioned allowances for nitrogen oxide 
emissions--a pollutant that contributes to the formation of smog--in 
2004. More recently, in 2005, RGGI was created to regulate the carbon 
dioxide emissions of large fossil fuel-fired generators in 
participating states. RGGI has auctioned nearly 87 percent of 
emissions allowances issued under the program for 2009, and each of 
the six centralized auctions held since September 2008 has raised 
between $38 million and $117 million for programs to promote energy 
efficiency and renewable energy projects, among other uses. In 
addition to auctions for emissions allowances, the U.S. government has 
experience conducting other types of auctions, such as for government 
securities, surplus property, oil leases, timber harvests, and 
electromagnetic spectrum licenses. The Treasury Department's Bureau of 
Public Debt, for example, conducts more than 250 public auctions per 
year involving over $5 trillion in marketable securities. 

In a cap-and-trade program for greenhouse gas emissions, covered 
entities and other interested parties will be able to buy allowances 
not only from the government, but also from participants in the 
secondary trading market. In the ETS, for example, allowances can be 
purchased through over-the-counter markets or on exchanges such as the 
European Climate Exchange in London or BlueNext in Paris. Secondary 
market trading can involve a range of intermediaries--including banks 
and brokers--and several types of allowance transactions can occur. 
"Spot" sales involve the immediate payment and delivery of allowances 
between two parties. Market participants may also trade "forward" or 
"futures" contracts, both of which allow for delivery of allowances at 
a later date.[Footnote 13] Futures contracts may be attractive to 
covered entities that wish to secure an allowance price in advance and 
reduce uncertainty about future compliance costs. Because the value of 
futures contracts fluctuates based on the current market price of 
allowances, parties that do not have a compliance obligation under the 
program may also wish to purchase them as an investment. 

The Method of Selling Allowances in a Cap-and-Trade Program Can 
Influence Program Outcomes: 

The literature and programs that we reviewed present many options for 
the design of a mechanism to sell allowances under a cap-and-trade 
program. We drew two major observations from the literature and the 
cap-and-trade programs we reviewed. First, because elements of the 
mechanism's design may affect outcomes--such as the price of 
allowances obtained at auctions and the cost of the program--it is 
important that design choices align with an emissions trading 
program's goals.[Footnote 14] Second, once a goal is chosen, 
policymakers have numerous choices regarding the sale of allowances, 
including whether to sell them on an exchange or use auctions. If 
policymakers choose auctions--as did the majority of countries 
participating in the ETS and the RGGI states--they must also make 
important design choices in the areas of format, participation 
requirements, frequency and timing, price controls, and rules for 
reporting and monitoring. 

Establishing Clear Goals Is Critical: 

Program officials and economists suggested establishing clear goals to 
help guide the design and implementation of government allowance sales 
in a cap-and-trade program. Identifying priorities early is critical 
to developing an effective sales approach, as certain designs may 
better serve certain goals. Goals commonly cited by researchers and 
program officials include: 

* Simplicity and transparency. Many economists and program officials 
recommended that allowance sales be simple and transparent for all 
participants. Sales should be guided by rules that are clear and 
understandable--both to participants and to the general public--to 
encourage participation, prevent discrimination, and ensure easy 
access to allowances. To that end, several economists and program 
officials recommended selecting an auction format that is easy to use 
and does not involve complicated bidding procedures. Reporting sales 
results in a public and timely manner can also help to create a 
transparent market. 

* Maximizing participation. Ensuring sufficient levels of 
participation in allowance sales is critical, according to available 
information and program officials we interviewed. Participation 
fosters competition and limits opportunities for collusion. Economists 
and program officials also advised that sales should not discriminate 
against any one group of participants, whether by excluding them 
directly or indirectly, such as through high transaction costs. 
Participation can also be encouraged with a simple and transparent 
auction design. 

* Economic efficiency. Economic literature suggests that efficiency is 
a key goal for allowance sales. In the case of allowance auctions, 
economic efficiency can be achieved if allowances are purchased by 
those who value them the most. A general measure of the efficiency of 
an auction, therefore, is its ability to generate bids that accurately 
reflect how much value a bidder places on the allowance. If efficiency 
is achieved, the resource--in this case, the right to emit greenhouse 
gases--is allocated to its highest-valued use. Efficiency may be 
affected by strategic bidding behavior or collusion if these 
activities artificially depress the price of allowances. 

* Facilitating price discovery. Allowance sales may help facilitate 
price discovery--the process of determining a commodity's price based 
on supply and demand. Sales that successfully facilitate price 
discovery will generate an allowance price that accurately reflects 
the marginal cost of reducing emissions. That is, the price would 
reflect decisions by covered entities either to reduce their emissions 
or to purchase allowances to cover them, whichever is more cost-
effective. Economists expect that this process of price discovery will 
prompt emissions reductions by those covered entities that can 
undertake them most cost-effectively. Without effective price 
discovery, the overall efficiency of the allowance market may be 
diminished, increasing the program's costs to the economy. According 
to several program officials involved in the ETS, the need for price 
discovery depends on the volume of allowances sold under the program. 
If only a small percentage is sold, and the rest freely allocated, 
price discovery will be accomplished in the secondary market.[Footnote 

* Avoiding market manipulation. According to economic literature, 
allowance sales should limit opportunities for participants to collude 
or engage in other forms of market manipulation. Collusion to depress 
allowance prices, if successful, could distort price signals, reduce 
revenues collected by the government from the sale of allowances, and 
cause participants and observers to question the fairness and 
transparency of the program. In addition, if allowance ownership were 
to become concentrated among a small group of participants in the 
secondary market, these participants could then withhold allowances 
from the market, driving up prices and impeding efficiency. However, 
several program officials and economists said it would be difficult to 
pursue such a strategy in the presence of a liquid market, since 
participants would have to acquire large shares of allowances both at 
individual auctions and in the secondary market. In addition, 
literature and economists we interviewed suggest that a U.S. cap-and- 
trade program for carbon dioxide allowances would likely attract a 
large number of participants. According to them, broad participation 
would prevent any single participant from gaining undue influence 
within the market, limiting opportunities for collusion and market 

* Revenue generation. Available literature suggests that policymakers 
could also aim to maximize the level of revenues collected from the 
sale of allowances. For example, policymakers could design a sale so 
that it is more likely to achieve high allowance prices. However, 
while maximizing revenue is a common goal in other government auctions 
of public assets, high allowance prices could increase the burden of a 
cap-and-trade program on covered entities or consumers of their 
products, which could erode political support for the program. 
Furthermore, some program officials noted that it would be much easier 
to accomplish this goal by increasing the stringency of the emissions 

* Minimizing administrative and transaction costs. Several economists 
and program officials recommended minimizing the administrative and 
transaction costs associated with allowance sales. Administrative 
costs are the time and resources governments spend designing and 
implementing allowance sales; available information suggests that most 
of these costs are incurred in the design phase of the program. 
Transaction costs, on the other hand, refer to costs incurred by 
participants in obtaining allowances--for example, costs associated 
with registering for an auction, developing a bidding strategy, and 
any bidding fees. According to available information, high transaction 
costs could discourage participation, and smaller entities in 
particular may face disproportionately high costs relative to the 
value of allowances they purchase. According to economic literature, 
the design of an allowance sale can have a significant impact on both 
administrative and transaction costs. For instance, weekly auctions 
may result in higher administrative and transaction costs than those 
held less frequently, although using existing infrastructure may help 
to minimize these costs. While several economists noted that any costs 
incurred by governments and participants would likely be minor 
compared to the value of the allowances, program officials said that 
keeping these costs low would help ensure ongoing support for the 

According to available literature and economists we interviewed, 
identifying the goals of the sale in advance can help policymakers 
evaluate the likely effects of a given sales method. This is 
especially important given that trade-offs may result from decisions 
regarding the various aspects of auction design. For example, a method 
that increases revenue collected from allowance sales may not be the 
most economically efficient approach. Some goals may also be 
interrelated--for example, a simple and transparent design may boost 
participation and reduce the risk of market manipulation. 

Many Design Options Are Available to Meet Established Goals: 

The literature and programs that we reviewed present many options for 
the design of a mechanism to sell allowances in a cap-and-trade 
program. Each option has implications that will help determine the 
extent to which a program meets its goals. At a high level, 
policymakers face a choice about using auctions or other types of 
sales to distribute allowances. Auctions, if used, would entail 
additional design choices. 

Sales or Auctions: 

According to available literature, selling emissions allowances 
through an exchange enables buyers to purchase allowances from an 
electronic platform as they would stocks or other commodities. While 
sales on an exchange are less widely used for emissions allowance 
distribution than auctions, two ETS member states have had experience 
with exchange-based sales: Germany (in ETS's Phase II) and Denmark (in 
ETS's Phase I).[Footnote 16] Germany's sales, directed by Germany's 
state-owned bank, took place through two major European exchanges--the 
European Climate Exchange and the European Energy Exchange.[Footnote 
17] Allowances were sold daily, according to rules specified by the 
government. The bank used the same process as other members of the 
exchange wishing to trade allowances, such that buyers could not 
distinguish the government from other participants in the secondary 
market. Denmark's sales method differed from Germany's in that it paid 
a fee to two private firms to sell allowances on European exchanges. 
Rather than instructing the two firms to sell allowances daily, as 
Germany did, Denmark structured the fees paid to the firms such that 
they received an incentive to sell when they judged price conditions 
to be most favorable. 

German and Danish officials we interviewed expressed general 
satisfaction with sales on exchanges and cited their potential 
strengths in meeting certain goals. For example, Germany's goal was to 
match the average secondary market price as closely as possible 
without disrupting the market, according to officials. Information 
provided by Germany's state-owned bank shows that the allowance price 
yielded through the exchanges did in fact mirror the market price of 
allowances sold during the same time period. Several officials praised 
the efficiency of such sales and reported general satisfaction among 
participants. Other potential advantages of sales over auctions 

* Lower administrative costs. Germany and Denmark used existing 
exchanges, which made it unnecessary to design and administer auctions. 

* Ease of use. Some member state officials we interviewed said that 
sales on exchanges are simpler than auctions on separate platforms 
because many of the large companies affected by the ETS are already 
registered and active participants in the exchanges. According to 
German officials, this is one reason Germany continued using existing 
exchanges when it made the transition from sales to auctioning in 2010. 

Despite these possible advantages, implementing such sales may prove 
challenging given the scale of a potential U.S. program. While Germany 
expects to sell or auction 40 million allowances annually in Phase II 
of the ETS--the highest volume among EU member states to date-- 
legislation being considered by the U.S. Congress proposes initially 
auctioning over 1 billion allowances in 2012 alone.[Footnote 18] On 
such a large scale, auctions may be more feasible or desirable than 
sales, according to several economists and program officials. For 
example, European officials said that if large volumes of allowances 
are sold in this manner, it may be difficult to ensure that all 
participants, including smaller entities, are equally able to buy 
allowances at the market price. Some program officials also expressed 
reservations that if a high volume of allowances were sold through 
exchanges, the government would become the dominant seller in the 
secondary market and affect the price formation process. Moreover, one 
economist pointed out that no extensive studies had been undertaken on 
the performance of sales on exchanges, whereas auctions are well 
understood as a mechanism of distributing government assets. 

Program officials reported that auctions, the more commonly used sales 
mechanism in the EU and RGGI, effectively distributed allowances to 
program participants, although several noted that allowance auctions 
have not yet been implemented on a large scale. According to economic 
literature and the economists and officials we interviewed, potential 
strengths of auctions include: 

* Price discovery. As economists and officials have noted, the process 
of auctioning helps to establish the cost of emission reductions and 
maintain an allowance price that reflects that cost. Auctions enable a 
government to put allowances together in "batches" and sell them at 
predetermined times, and may help regulated entities make business 
decisions that incorporate the cost of compliance with emissions 
regulations. As one economist explained, auctions encourage covered 
entities to assess their marginal costs of emissions abatement, 
consider their allowance needs carefully, and bid accordingly. 
However, some economists and officials said that regardless of whether 
auctions or sales are used, price discovery will occur in the 
secondary market, once that market becomes established. 

* Simplicity. Many of our interviewees cited auctions' simplicity as 
an advantage over sales because auctions are well-understood. RGGI 
officials reported that covered entities with a range of auction 
experience received training in the RGGI auction process and had no 
trouble familiarizing themselves with it. 

* Lower transaction costs. Holding periodic auctions--weekly, monthly, 
or quarterly, for example--may decrease the per-transaction cost of 
buying and selling allowances, since buyers and sellers would not need 
to devote the time and resources necessary to participate in daily 

* Transparency. According to economists and officials, auctions take 
place under established rules and time frames, and thus convey clear 
information about when and how the government will sell allowances. 
According to European Commission officials, establishing a clear and 
predictable auction calendar can help inform market participants of 
the precise timing of volumes coming into the market, thereby avoiding 
unnecessary uncertainty and price volatility.[Footnote 19] Sales on 
exchanges may be less transparent, since it is difficult to monitor 
who is selling allowances and at what time. 

Program officials noted that auctions can also be administered through 
exchanges. For example, Germany decided to conduct auctions using an 
existing European trading exchange beginning in 2010. According to a 
program official, this approach allows them to draw on preexisting 
auction infrastructure and administrative processes, as allowance bids 
are subject to the same rules as other exchange transactions. The 
European Commission's for the draft auctioning regulation governing 
ETS auctions in Phase III and beyond also proposes using an exchange 
or other trading platform to vet participants and administer auctions. 

Allowance auctions could also be administered in other ways. For 
example, policymakers could use existing government auction 
mechanisms--such as those used by the U.S. Treasury to auction 
securities--to auction allowances. Alternatively, policymakers could 
choose to create a new auctioning platform or hire contractors to 
administer auction processes. For example, RGGI opted to use a 
proprietary auctioning platform, run by a contractor with experience 
in administering auctions for energy commodities. 

If auctions are used, several other design determinations must be 
made, including: format, timing and size, participation requirements, 
price controls, and monitoring and reporting requirements. 

Auction Format: 

The choice of auction format can affect how well the auction aligns 
with predetermined goals, such as maximizing simplicity, avoiding 
market manipulation, and aiding in price discovery. We focused our 
analysis on two classes of auctions most commonly discussed in the 
context of emissions allowance auctions--"uniform-price" and 
"discriminatory-price" auctions. 

Choosing an appropriate auction format involves answering two key 

* What price should winning bidders pay for allowances? 

- In uniform-price auctions, all winning bidders pay the same price 
for the items purchased. In the hypothetical example illustrated in 
table 1, 5 companies bid for 10 allowances in a uniform-price auction. 
Even though they made different bids, each company that bids above a 
certain price receives allowances at the same price. This "clearing 
price" is the highest price point at which all of the 10 allowances 
available would be sold.[Footnote 20] In this example, companies A, B, 
and C each receive allowances at the clearing price of $3.50, although 
Company C receives only 2 of the 3 requested allowances because the 
number of bids at or above the clearing price exceeds the number of 
allowances available at this price. Companies D and E, which bid below 
the clearing price, receive no allowances. 

Table 1: A Hypothetical Uniform-price Auction of 10 Allowances: 

Name of company: Company A; 
Number of allowances requested: 6; 
Price per allowance requested (in dollars): $5.00. 

Name of company: Company B; 
Number of allowances requested: 2; 
Price per allowance requested (in dollars): $4.00. 

Name of company: Company C; 
Number of allowances requested: 3; 
Price per allowance requested (in dollars): $3.50. 

Clearing price: $3.50. 

Name of company: Company D; 
Number of allowances requested: 4; 
Price per allowance requested (in dollars): $2.75. 

Name of company: Company E; 
Number of allowances requested: 4; 
Price per allowance requested (in dollars): $2.50. 

Source: GAO. 

Note: There were 10 allowances available. Companies A and B received 
the full allowance request, Company C received a partial allowance 
request, and Companies D and E received no allowances. 

[End of table] 

* In "discriminatory-price" auctions, winning bidders pay different 
prices for allowances purchased at auction. In some discriminatory- 
price auctions, winning bidders pay the amount of their bid. For 
example, in the hypothetical auction presented in table 1, Company A 
would get its full share of requested allowances at $5 each, Company B 
would pay $4 each, and Company C would receive part of its request at 
$3.50 per allowance. 

* How many rounds of bidding should take place? 

- In a typical single-round auction, participants place bids once 
during a predetermined time period. Because participants do not see 
other bids before the outcome is announced, no opportunity is provided 
to change a bid based on information about others' bids. The single-
round auction is thus sometimes referred to as a "sealed-bid" auction. 
[Footnote 21] Figure 1 presents a simplified version of the RGGI 
software interface that participants use for RGGI's single-round 
auctions. As the figure shows, participants assemble a bid sheet, 
specifying the quantity of allowances requested at a stated bid price. 
Each participant may submit several bids at several different prices, 
if desired. According to a RGGI program official, when RGGI's auction 
results are tabulated by the auction administrator's automated system, 
the results appear in a format similar to that shown in table 1. 
Participants whose bids appear above the line receive allowances, 
those bidding at the clearing price receive a partial allocation, and 
those below the line do not receive allowances. 

Figure 1: Participant's Bidding Screen, RGGI Uniform-Price, Single- 
Round Auction: 

[Refer to PDF for image: illustration] 

The following information appears on the illustration of the screen: 

RGGI CO2 Budget Trading Programs: 

Place Bid: 

Auction Information: 

Auction Start Time: 11:00 a.m. 
Time Left: 0d 2h 25m 16s; 
Auction End Time: 1:30 p.m. 
Your Total Bids: 6; 
Total Quantity: 3,000 allowances; 
Reserve Price: $1.86. 

Bid Summary: 

Bid Value: $408; 
Bid Quantity Total: 200 allowances. 

Bid History: 
Total Bids in View: 6; 

Company Name: Company E; 
Bid Amount: $5.00; 
Bid Quantity: 5; 
Bid Value: $25.00; 
Cumulative Quantity: 5. 

Company Name: Company E; 
Bid Amount: $3.50; 
Bid Quantity: 10; 
Bid Value: $35.00; 
Cumulative Quantity: 15. 

Company Name: Company E; 
Bid Amount: $2.00; 
Bid Quantity: 15; 
Bid Value: $30.00; 
Cumulative Quantity: 30. 

Company Name: Company E; 
Bid Amount: $1.90; 
Bid Quantity: 20; 
Bid Value: $38.00; 
Cumulative Quantity: 50. 

Company Name: Company E; 
Bid Amount: $1.88; 
Bid Quantity: 50; 
Bid Value: $94.00; 
Cumulative Quantity: 100. 

Company Name: Company E; 
Bid Amount: $1.86; 
Bid Quantity: 100; 
Bid Value: $186.00; 
Cumulative Quantity: 200. 

Source: Adapted from World Energy Solutions, Inc., RGGI’s auction 
administrator. The table in the original replicates the RGGI auction 
bidding screen. 

[End of figure] 

- Auctions with multiple rounds of bidding occur in several formats, 
among them the "English" auction, in which the auction administrator 
raises the price of allowances round by round, and the "Dutch" 
auction, in which the auction administrator decreases the price round 
by round. Both the English and Dutch auctions are commonly referred to 
as "clock auctions," since the price is raised or lowered 
incrementally, like a clock's hands. Participants in multiple-round 
auctions have the opportunity to change the quantity of allowances for 
which they bid--or drop out of the bidding--as information is revealed 
round by round. Importantly, economists note that to discourage 
participants from potentially distorting allowance prices by 
increasing the quantity for which they bid in later rounds--after 
competitors have revealed their strategies--a clock auction can 
include a rule against increasing the bid quantity after the first 
bidding round. 

In designing an auction, policymakers may consider selecting a format 
that is sensitive to the context of the allowance market. Previous 
U.S. federal government experience with auctions has involved 
different formats in different markets. For example, in 1994 the 
Federal Communications Commission chose to auction spectrum licenses 
in a simultaneous multiple-round format. By contrast, Environmental 
Protection Agency auctions of allowances to emit sulfur dioxide 
involve a single round where successful bidders pay as they bid, and 
auctions of government securities held by the U.S. Department of the 
Treasury involve uniform pricing. 

In interviews and in economic literature, officials and economists 
have emphasized the importance of tailoring an auction for carbon 
dioxide allowances to the characteristics of the market, which may be 
different from other markets where auctions have been used. An auction 
of carbon dioxide allowances would sell many identical items--permits 
to emit a specified quantity of carbon dioxide in a particular time 
period.[Footnote 22] Additionally, bidders in this market could 
include a large number of covered entities that emit carbon dioxide. 
These characteristics reveal both similarities and differences from 
some of the other markets listed above. For example, not all broadband 
spectrum licenses are alike, and their value to a buyer may further 
depend on the portfolio of licenses held. Furthermore, the number of 
potential buyers may be greater in the market for carbon dioxide 
emissions than sulfur dioxide emissions, in part because carbon 
dioxide is emitted in greater volume. 

Existing cap-and-trade programs for carbon dioxide allowances--the EU 
ETS and RGGI--have employed the uniform-price, single-round format, in 
which winning bidders submit secret bids and pay the same price for 
allowances. Several program officials we spoke with expressed general 
satisfaction with this format, and the draft auctioning regulation 
governing ETS auctions in Phase III and beyond also proposes this 
approach. According to literature and economists we interviewed, 
advantages of this format include: 

* Simplicity. For regulated entities that have participated in 
auctions, the simplicity and familiarity of the uniform-price, single- 
round format may prove valuable, according to several economists. This 
format has also proved easy to learn for those unfamiliar with auction 
processes, according to officials, as it involves relatively simple 
bidding procedures. One economist also reported that the uniform-
price, single-round format is well-suited to automation compared to 
other auction formats, with much of the work handled by sophisticated 
but inexpensive computer programs. This economist pointed to RGGI, a 
small organization handling large pools of assets, as a case study in 
how simple the uniform-price, single-round auction can be to 

* Avoidance of market manipulation. Some economists said that other 
auction formats, such as clock auctions, may be more conducive to 
collusion than single-round auctions, because multiple bidding rounds 
give other bidders information and create opportunities for collusion. 

* Reduced risks for bidders. Program officials and economists also 
said that the uniform-price, single-round format may alleviate 
concerns that could arise in discriminatory-price auctions. If a 
discriminatory-price auction requires participants to pay the value of 
their bids, for example, they run the risk of overbidding and paying 
more than other winning bidders for allowances. This may be of 
particular concern for small and inexperienced bidders, who may lack 
the information and resources to formulate a sophisticated bidding 
strategy. Uniform-price auctions reduce the possibility of making a 
costly bidding mistake, since all winning participants pay the same 
allowance price. For this reason, some economists believe that uniform-
price auctions will generate greater participation than discriminatory-
price auctions. 

Despite the strengths of the uniform-price, single-round format, some 
economists suggested that policymakers undertake further study before 
selecting an auction format. One study suggests that laboratory 
experiments with auction format options may provide insights that 
theoretical studies cannot, given the context-specific nature of the 
performance of various auction formats.[Footnote 23] One economist 
also said that legislation need not specify a single auction format 
and could instead instruct government agencies responsible for the 
program to choose among various format options. Several RGGI states 
followed this path, by issuing regulations authorizing the auction 
administrator to use the uniform-price, single-round auction format or 
the ascending price, multiple-round format.[Footnote 24] Policymakers 
could also leave room to revisit the auction format stipulated in cap-
and-trade legislation, although introducing significant changes at 
later stages would require participants to relearn auctioning 

Among auction format options other than the uniform-price, single-
round format, the clock format may have comparative strengths in 
achieving certain goals, according to economists we interviewed. For 
example, economic literature suggests that clock auctions may lead to 
more reliable price discovery, since each participant may raise its 
bids in an attempt to win allowances, so that allowances go to those 
who are willing to pay the most.[Footnote 25] However, economists who 
did experimental work on auction formats said that a clock auction 
fared no better in terms of price discovery than a uniform-price, 
single-round auction. Another argument for the clock format arises if 
multiple products are sold at an auction. For example, in addition to 
auctioning allowances for the current year, the government could 
decide to auction allowances of other future-year vintages--that is, 
allowances sold in advance of the compliance year(s) in which they may 
be remitted. A clock format would allow bidders to express preferences 
for different vintages, which may allow more readily for substitution 
of one vintage for another and prevent price irregularities. 

The clock auction format may also present some disadvantages. An 
official involved with Ireland's auctions said they chose a uniform-
price, single-round format after determining that a clock auction 
would be comparatively expensive and difficult to implement. The 
format may also complicate participation: one economist involved with 
Virginia's clock auctions of nitrogen oxide allowances received 
complaints about participants having to work at a computer terminal 
all day to compete in the auction. A single-round auction format, by 
contrast, would only require participants to submit a single bid 
sheet, similar to that shown in figure 1 above. The economist also 
pointed out that having thousands of participants monitoring a day of 
multiple-round auctioning in a large federal program would increase 
the cost of both participating in the program and administering it. 

Other Auction Design Elements: 

Apart from format, policymakers would face a number of choices related 
to auction design, each of which has implications for program 
outcomes. Among other things, choices must be made regarding 
participation rules, the frequency and timing of auctions, the use of 
reserve prices or other price controls, and the monitoring and 
reporting of auction activities. We briefly describe each of these 
considerations below and provide additional detail in appendix II. 

Participation. Maintaining high levels of auction participation can 
lead to greater competition which, in turn, can reduce the risk of 
collusion or other market manipulation. To maximize participation, 
economists and program officials recommended opening auctions up to as 
wide of a group of bidders as possible, including financial 
institutions and other entities that do not have compliance 
obligations under the program. According to them, limiting 
participation can increase the risk of market manipulation, making it 
difficult to ensure that all covered entities have access to 
allowances. In addition, program officials said that a well-designed 
vetting and registration system can reduce the risk that a participant 
will default on a bid. 

Frequency and timing. According to economists, the frequency of 
auctions should be driven by the volume of allowances sold: higher 
volumes of allowances may require more frequent auctions. Available 
information suggests that holding frequent auctions, such as monthly 
or weekly, can help maintain market liquidity and provide flexibility 
to covered entities. On the other hand, some officials said frequent 
auctions may also complicate planning and increase administrative 
costs, depending on how the auctions are conducted. In terms of 
timing, many officials recommended auctioning future-year vintage 
allowances, which allow covered entities to secure allowances in 
advance and reduce the risks associated with fluctuating prices. 

Price controls. Price controls could be implemented in a number of 
ways. A reserve price would set a price below which no allowances can 
be sold at an auction. Several program officials and economists 
suggested that setting a reserve price can be an effective way to 
guard against low auction clearing prices that may result from 
collusion or low participation. In addition, in some cases a reserve 
price may serve as a "price floor" throughout the secondary market. 
According to some economists and researchers, a price floor may help 
provide incentives for investment in low carbon technologies; however, 
some program officials cautioned that price floors could unduly 
interfere with the functioning of the allowance market. At the other 
end of the price spectrum, policymakers could also set upper limits on 
the price of allowances through price ceilings. While price ceilings 
could provide insurance against sustained high allowance prices, some 
program officials advised against the use of these measures, which 
they said could compromise emissions goals and impede international 
linkage of programs. 

Monitoring and reporting. An effective system to report auction 
results and monitor activity can increase transparency and help 
oversight entities identify and correct instances of market abuse. 
Information on auction results can also provide information with which 
to evaluate and improve the program. As a result, several officials 
and economists recommended establishing a market monitor to track 
activity at auctions and in the secondary market. However, in 
reporting auction results, economists and officials cautioned against 
reporting certain information, such as bidders' identities, which they 
said could inadvertently facilitate collusion. 

We conducted our work from December 2008 to February 2010 in 
accordance with all sections of GAO's Quality Assurance Framework that 
are relevant to our objectives. The framework requires that we plan 
and perform the engagement to obtain sufficient and appropriate 
evidence to meet our stated objectives and discuss any limitations in 
our work. We believe that the information and data obtained, and the 
analysis conducted, provide a reasonable basis for any findings and 
conclusions in this product. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
appropriate congressional committees and other interested parties. In 
addition, the report will be available at no charge on GAO's Web site 
at [hyperlink,]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-3841 or Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this report. Individuals making key 
contributions to this report are listed in appendix IV. 

Sincerely yours, 

Signed by: 

John B. Stephenson: 
Director, Natural Resources and Environment: 

[End of section] 

Appendix I: Scope and Methodology: 

Our review assesses the implications of different options for selling 
allowances in cap-and-trade programs. To address this objective, we 
first identified cap-and-trade programs that regulate carbon dioxide 
emissions and have sold allowances through auctions or other means. 
Programs that met these criteria were the European Union's (EU) 
Emissions Trading Scheme (ETS) and the Regional Greenhouse Gas 
Initiative (RGGI). We then selected a nonprobability sample of 5 
member states involved in the ETS--Austria, Denmark, Germany, Ireland, 
and the United Kingdom--in order to assess different methods that EU 
governments have used to sell allowances.[Footnote 26] This sample 
enabled us to assess allowance sales that exhibited variation in 
several key areas: the size of the allowance market, the share of 
allowances auctioned, the design of the sale, and the amount of 
revenue generated. While the sample allowed us to learn about many 
important aspects of, and variations in, the design of allowance 
sales, it was not intended to provide findings that would be 
generalizable to all allowance sales. 

To identify various options for selling allowances, we identified and 
reviewed over 40 works of academic and professional research produced 
by economists, industry associations, research organizations, academic 
institutions, and environmental groups, including international 
research. We identified these works through an internet and database 
search using relevant key words such as "allowance sales" and "auction 
design." We also analyzed literature from government agencies, 
including the Congressional Budget Office (CBO) and the Congressional 
Research Service (CRS). Reviewing this research helped us to assess 
the different methods for designing an allowance sales mechanism and 
the potential implications of these methods. We did not independently 
assess the validity of data, assumptions, or methodologies underlying 
the economic studies we reviewed. We met with U.S. and international 
stakeholders including officials from RGGI and the European Commission 
as well as program officials in Austria, Denmark, Germany, Ireland, 
and the United Kingdom. We also conducted semistructured interviews 
with leading economists and researchers selected on the basis of their 
expertise in climate policy or auction design. 

[End of section] 

Appendix II: Other Elements of Auction Design: 

There are several key elements of auction design, in addition to 
format, that can affect whether an auction meets its established 
goals. This appendix provides more detail on the observations and 
recommendations of program officials, economists, and the economic 
literature regarding the following auction design elements: 
participation, frequency and timing, price controls, and reporting and 

Participation Requirements: 

Policymakers may shape participation in a cap-and-trade auction 
through various aspects of auction design. For example, auctions could 
be designed to restrict participation or to provide special assistance 
to smaller entities. Available information suggests that maintaining 
high rates of participation in allowance auctions can help promote 
liquidity and reduce the risk of collusion. We discuss three auction 
characteristics that help determine participation: participation 
limits, bid limits, and procedures for vetting and registration. 

Participation limits. Available literature suggests that limiting or 
eliminating the ability of certain entities to participate in 
allowance auctions could reduce the amount of revenue generated 
through the auctions and hinder the efficient allocation of 
allowances. For example, excluding those entities that do not have a 
compliance obligation under the program would decrease overall auction 
participation, which, in turn, may increase the likelihood of 
collusive activities to depress allowance prices. In addition, if the 
auction clearing price falls below the price in secondary markets--
whether due to collusion or other factors--auction participants may be 
able to buy allowances at auction and sell them on the secondary 
market for profit, thus capturing revenues that would have otherwise 
gone to the government. According to one study, the end result would 
be an implicit subsidy to the entities allowed to participate in the 
auction and a corresponding reduction in government revenue. Moreover, 
some program officials maintained that restricting certain groups from 
participating may present practical challenges given the interrelated 
nature of the marketplace--for example, while a buyer may not be a 
covered entity under the cap-and-trade program, it could be a parent 
company, supplier, or partner to a covered entity. According to 
researchers involved in the design of RGGI's auctions, attempting to 
assess and monitor these relationships could prove costly for an 
auction administrator. 

Given these concerns, many economists and program officials favored 
maximizing the number of potential auction participants. Auctions held 
within the ETS and RGGI, for example, have allowed noncovered 
entities--including banks, brokers, and other private firms--to 
purchase allowances at auctions. In fact, noncovered entities have 
purchased between 16 and 30 percent of allowances sold in RGGI 
auctions thus far, according to auction results data published on 
RGGI's Web site. Economists and officials involved with these programs 
said that financial entities can play an important role in the market. 
For example, banks and brokers can foster liquidity and help provide 
regular price signals to covered entities. Smaller entities, in 
particular, may prefer purchasing allowances at financial 
institutions, as this relieves them of the need to learn the 
particulars of the auction process and develop an appropriate bidding 

Bid limits. To prevent entities from hoarding allowances--which could 
allow these entities to gain a competitive advantage or raise the 
price of allowances, among other things--policymakers could set limits 
on the amount of allowances entities can purchase at auction. For 
example, in RGGI, associated entities can purchase no more than 25 
percent of the allowances available in a given auction. However, such 
limits may be difficult to enforce, according to one program official, 
since one entity may be able to bid on behalf of another. Moreover, 
several economists and program officials we spoke with suggested that 
hoarding behavior would be highly unlikely in a future U.S. program, 
since an entity aiming to corner the market may have to buy the 
majority of allowances across several consecutive auctions, an 
unlikely possibility given the anticipated price and volume of 
allowances and the number of entities seeking them. 

Vetting and registration. For an auction to be successful, 
participants must meet the financial commitments associated with their 
bids. Auctions may therefore include an application and screening 
process in which potential bidders demonstrate their eligibility to 
participate by providing information such as their credit and 
bankruptcy history.[Footnote 27] The process could also include a 
declaration of "beneficial ownership," which would require bidders to 
declare whether they would bid on their own account or on behalf of 
another entity. According to available information, identifying the 
beneficiaries of allowance transactions may help the entity 
responsible for monitoring the market spot evidence of potential 
market manipulation. Economists and program officials also recommended 
requiring participants to post some type of financial assurance, such 
as a bond, deposit, or letter of credit demonstrating their ability to 
pay. Financial assurance requirements can serve as collateral in the 
event that participants are unwilling or unable to pay, and thus 
should be set at a level that ensures payment without discouraging 
participation. In Ireland's first auction, for instance, the 
nonrefundable deposit was set at about 3,000 Euro, or about $3,778. 
According to program officials, this amount was later determined to be 
insufficient to compel payment--for example, if the prices in the 
secondary market fell below the clearing price after the auction, it 
may have been less expensive for the bidder to simply forfeit their 
deposit and nullify the sale. As a result, Irish officials raised the 
deposit amount to about 15,000 Euro, or about $18,890, in the second 

While economists emphasize the importance of providing financial 
assurance, it is also important not to impose undue costs or paperwork 
requirements on participants. As a result, some economists recommended 
relying on established measures--such as credit scores--and 
simplifying the process as much as possible. An official involved with 
administering RGGI, for example, reported that RGGI made several 
improvements to its participant qualification procedures--including 
allowing electronic submissions and eliminating notarization 
requirements--after receiving feedback from participants. Program 
officials involved with the ETS also said that outsourcing vetting 
activities to an entity with experience in these activities, like an 
exchange, may help reduce the cost of these activities. 

As existing programs have demonstrated, auction activities--including 
attracting and vetting potential auction participants and facilitating 
the bidding process--can be undertaken by either the government or a 
designated private entity. In RGGI, for example, a private consulting 
firm administers the auctions and conducts these activities. In 
contrast, Germany uses an existing emissions trading exchange to 
administer the auctions and conduct the required due diligence on 
potential auction participants. Another option to cut down on the 
government's administrative burden is to implement a "primary 
participant" model, an approach used in the United Kingdom to auction 
both government bonds and emissions allowances. In United Kingdom 
allowance auctions, all bidders must go through one of 11 registered 
primary participants--all large financial firms--to place their bids. 
The primary participants can also bid on behalf of themselves. 
[Footnote 28] A similar approach is used by the U.S. government to 
auction Treasury bills and bonds--most are purchased by banks and 
securities brokers (primary dealers) that trade directly with the 
Federal Reserve, although individuals and other entities can also 
participate in the auction. According to a program official involved 
with United Kingdom auctions, a major advantage of this model is that 
primary participants are responsible for developing and implementing 
vetting procedures and assume the financial risks associated with 
default. In addition, the banks that serve as primary participants 
already have experience performing background checks. 

However, a primary participant model may also have some drawbacks, 
according to program officials. For example, United Kingdom primary 
participants were initially not compensated for their services, which 
may have dampened participation in the first auction and resulted in a 
lower clearing price. Primary participants are now compensated for 
each indirect bid they facilitate by paying a discounted clearing 
price.[Footnote 29] According to one official involved in United 
Kingdom auctions, this has improved auction participation and 
generated higher clearing prices. However, the official also 
acknowledged that some large bidders--such as electricity generators--
oppose the primary participant model because it forces them to 
disclose their bidding strategy to another entity; they would rather 
participate in the auctions directly. As a result, the outline for the 
draft auctioning regulation for Phase III and beyond proposes allowing 
bidders to access auctions directly. 

Provisions for smaller entities. Another option for encouraging 
participation is to enact special provisions for smaller entities, 
which may be discouraged from participating in auctions due to a lack 
of information or experience. For example, Austria and the United 
Kingdom have implemented "non-competitive" auctions, which allow some 
entities to bid for a limited amount of allowances prior to the actual 
(competitive) auction. By eliminating the need to compete with larger, 
better-informed entities, non-competitive auctions aim to provide 
assurance that smaller entities will be able to obtain needed 
allowances without running the risk of overbidding. However, thus far 
participation in non-competitive auctions has been low--of the 100,000 
allowances set aside for Austria's first non-competitive auction, only 
about 5,000 were actually sold. Further, in the European Commission's 
2009 consultation on the auction regulation, respondents showed little 
interest in incorporating non-competitive auctions or other special 
provisions for smaller entities. While a Commission official we spoke 
with acknowledged that few small entities contributed to the 
consultation, this official and others reported that smaller entities 
have generally preferred to purchase their allowances from banks and 
brokers rather than at auction. 

Frequency and Timing: 

If auctions are used to sell allowances, policymakers must consider 
issues related to timing, including how frequently to hold auctions 
and whether to auction future years' allowances in advance. According 
to available literature and economists we interviewed, the timing of 
auctions can have implications for market dynamics, prices, 
administrative costs, and participation. A variety of timing 
approaches are used in existing programs--for example, RGGI holds 
quarterly auctions, whereas Germany began holding two auctions twice 
weekly in 2010. 

Program officials and economists we interviewed said that determining 
the appropriate auction frequency depends largely on the number of 
allowances auctioned during each year. Several noted that higher 
volumes of allowances may require more frequent auctions, so as to 
ensure a manageable and constant flow of allowances into the market. 
Because of uncertainty about the size of a future U.S. program, one 
program official was hesitant to recommend a specific frequency. 

Nevertheless, available literature and our interviews point to several 
arguments in favor of holding auctions relatively frequently, such as 
weekly. First, economic literature indicates that frequent auctions 
can help maintain market liquidity and price stability. Because 
allowances would be sold in smaller batches, frequent auctions help 
encourage a constant flow of allowances into the market, reducing the 
impact of individual auctions on market prices. For this reason, the 
outline for the draft regulation outline governing Phase III of the 
ETS and beyond--when the level of auctioning is expected to increase 
significantly--proposes holding auctions at least weekly. Second, 
frequent auctions may help covered entities to meet their compliance 
obligations in a timely and flexible manner, rather than running the 
risk of submitting a losing bid and having to wait several months 
until the next auction. Third, frequent auctions may alleviate the 
need for a covered entity to set aside large amounts of capital to 
compete for bigger, less frequently available blocks of allowances, 
which may be especially difficult for smaller entities. Frequent 
auctions also may facilitate efficient and flexible transactions 
through financial or other intermediaries, which can benefit both 
small and large covered entities. Finally, smaller, more frequent 
auctions may help mitigate the risk that participants could purchase a 
substantial fraction of allowances in an attempt to manipulate 
allowance prices. 

However, holding frequent auctions may present trade-offs, according 
to available literature. Administrative and transaction costs could 
rise if auctions are held more frequently, and higher costs could 
reduce participation. In addition, officials involved in administering 
RGGI's quarterly auctions said it would be difficult to conduct 
necessary pre- and post-auction activities--including finalizing 
sales, returning auction collateral to bidders, and compiling reports--
if auctions took place more frequently. Another potential disadvantage 
of frequently held auctions is the risk that participation will be low 
at some auctions. 

Policymakers may choose to sell future-year vintage allowances in 
advance of the compliance year(s) in which they may be remitted. For 
example, in addition to offering allowances for the current 3-year 
compliance period, RGGI auctions also offer participants the ability 
to purchase allowances for the second compliance period, which is to 
start in 2012. In the ETS, allowances for Phase III of the program, 
which begins in 2013, may be auctioned as early as 2011 or 2012, 
according to the draft outline for the auctioning regulation. 

Available literature and economists and officials we interviewed 
identified several potential benefits associated with auctioning 
allowances prior to the compliance period in which they may be 
remitted. Most importantly, it enables covered entities to hedge 
against the uncertainty of future allowance prices by purchasing them 
in advance. Auctions of future-year allowances may be particularly 
beneficial to electricity generators, which often establish contracts 
for fuel and electricity one to three years ahead of delivery. 
Entities could also potentially hedge price risk by establishing 
futures contracts with financial intermediaries; however, these 
intermediaries may charge risk premiums that may be passed on to 

Available information suggests that holding auctions even before the 
cap-and-trade program's first compliance period may help to jump-start 
the process of price discovery and improve liquidity. For example, 
RGGI held its first auction in September 2008, approximately 3 months 
before the first compliance period began. A RGGI official said that 
this early auction provided price information that proved beneficial 
to financial institutions and covered entities alike. 

However, holding advance auctions may also present risks. According to 
one program official, if actual emissions under the program are lower 
than expected, auctioning a greater number of allowances early on may 
depress prices in the short term. 

Price Controls: 

In designing a cap-and-trade program, policymakers may decide to set 
limits around the price of emissions allowances sold at auctions or in 
the secondary market. For example, setting a reserve price would 
establish a minimum price below which no allowances could be sold at 
auction. The use of reserve prices is relatively common in greenhouse 
gas auctions--for example, RGGI and the EU member states we reviewed 
all used reserve prices.[Footnote 30] Policymakers could also decide 
to limit the extent to which allowance prices could rise and fall in 
the secondary market through price "floors" or "ceilings". 

Reserve prices and price floors. According to economic literature and 
program officials, a reserve price may have several benefits. For 
example, a reserve price could reduce incentives for collusion by 
limiting the profitability of collusive activities. A reserve price 
could also be used to safeguard against unusually low clearing prices 
at an auction due to low participation or other unforeseen events. 
According to one economist, an auction that produces allowance prices 
that are substantially lower than those in the secondary market may 
raise concerns about efficiency and equity. Protecting against such a 
scenario is the primary reason that the United Kingdom chose to 
institute reserve prices for its auctions, according to a program 
official. However, this official did not expect the reserve price ever 
to be triggered, since the likelihood of insufficient participation or 
collusion was extremely low. 

Despite the fact that allowances are traded in secondary markets--
where the government does not control prices--a reserve price may have 
effects that extend beyond the auction itself. In some cases, for 
example, the reserve price may effectively set a "price floor" for 
allowances throughout the secondary market. According to economic 
literature, the extent to which a reserve price serves as a marketwide 
price floor depends on several factors, including the share of 
allowances to be auctioned and the ability to purchase offset permits 
or other imported allowances. For example, a CBO report said that a 
reserve price could create a price floor if the government chose to 
sell a significant fraction of emission allowances, as opposed to 
distributing them for free.[Footnote 31] A key benefit of a price 
floor, according to some economists and researchers, is that it 
provides more consistent financial incentives for investment in low- 
carbon and energy-efficient technologies that could potentially reduce 
compliance costs in the long run. By establishing a minimum price on 
emissions, a price floor could also result immediately in more 
intensive use of low-carbon energy sources or encourage consumers to 
choose goods and services that are less carbon-intensive. 

While few economists and program officials disagreed with the use of 
auction reserve prices as a general protective measure, some expressed 
concern about using a reserve price to implement a marketwide price 
floor. For example, program officials involved in administering the 
ETS cautioned that price floors are unnecessary and can unduly 
interfere with the functioning of the allowance market. Accordingly, a 
European Commission official said that while an auction reserve price 
may be incorporated into the auction design, the primary law 
underpinning the ETS bars the use of price floors. Finally, some 
program officials warned that price floors could limit participation 
from certain entities--such as large banks--by reducing their 
opportunities for profit. 

If a reserve price is used, policymakers would also need to consider 
what to do if it is triggered. Because no bids below the price would 
be accepted, some allowances at the auction would go unsold. One 
option for addressing unsold allowances is to retire them by removing 
them from the program entirely, an approach some researchers and 
program officials support as a way to help preserve the program's 
environmental integrity. Specifically, triggering the reserve price 
may indicate that the emissions cap is too generous; retiring 
allowances that remain unsold at the reserve price would effectively 
make the cap more stringent. Another option would be to "roll forward" 
any unsold allowances to the next auction, an approach used by the 
United Kingdom in allowance auctions. Economists describe this 
approach as administratively simple; however, when any unsold 
allowances are rolled over, as opposed to retired, future allowance 
prices could be lower, reducing incentives for emission reductions. A 
third option would entail placing the unsold allowances into a 
"contingency bank" and releasing them for sale at the next auction 
that closed at a price above a pre-identified trigger price. This 
approach removes unnecessary allowances from the program while demand 
is low but keeps allowance prices (and compliance costs) from rising 
as sharply as they otherwise would in subsequent periods when demand 
is high. However, one economist cautioned that managing the bank could 
introduce political risks. Importantly, each of these three options 
applies to a scenario in which a reserve price is applied at auction. 
If policymakers decided to implement a firm price floor that applied 
throughout the secondary market, the government would have to 
guarantee a minimum price to sellers in that market. In this case, 
triggering the floor price would indicate that the quantity of 
allowances offered for sale at the floor price exceeded the quantity 
demanded by market participants. To guarantee the minimum price, the 
government could buy back the excess quantity. However, this could 
create budgetary and other complications, as the government would not 
be able to anticipate market outcomes. 

Price ceilings and strategic reserves. To protect against unexpectedly 
high compliance costs, some cap-and-trade proposals also involve 
setting an upper limit on the price of allowances, either through a 
price ceiling--often known as a "safety valve"--or by establishing a 
"strategic reserve" of allowances. A safety valve would give covered 
entities the opportunity to purchase an unlimited amount of additional 
allowances from the government at a predetermined price. In the event 
the allowance price rose higher than the safety valve price, covered 
entities could buy allowances from the government at the lower price 
rather than purchasing them on the market. If the safety valve was 
triggered and additional allowances released, however, emissions could 
rise beyond the level set by the initial cap and compromise the 
program's emissions goals. As an alternative option, policymakers 
could set a strategic reserve of allowances to be released only if the 
price threshold is reached. The key distinction from a safety valve 
approach is that the allowances in the reserve would eventually be 
paid back in some way, thus maintaining the integrity of the cap over 
time. If the allowances in the reserve were used, for example, the 
corresponding increase in emissions could be offset, such as by 
tightening emissions caps in future years. 

Some economists and program officials have cited several possible 
advantages associated with price ceilings. Setting a maximum price for 
allowances would provide insurance against unexpected price spikes in 
allowances--or a sustained period of high prices--either of which 
could cause the price of consumer goods and services to rise. If 
allowance prices are higher than expected, for example, a price 
ceiling could limit the costs to businesses and consumers while new 
technologies are developed that may achieve reductions at less cost. 
Because it provides some parameters around the cost of the cap-and-
trade program, a price ceiling could also reduce the risk that firms 
that are both energy-intensive and trade-intensive will face 
competitive pressures from industries in countries without comparable 
limits on greenhouse gas emissions. Finally, establishing price 
ceilings in advance may increase the likelihood that the program will 
endure through severe economic fluctuations, thus providing certainty 
to investors. 

Several of the potential disadvantages cited for price floors also 
apply to price ceilings--namely, that they may interfere with market 
functioning and discourage participation by financial entities. In 
addition to these disadvantages, a safety valve could have negative 
environmental implications if emissions rise considerably higher than 
the established caps. Available information suggests that establishing 
a safety valve in a U.S. program could impede linkages with other cap- 
and-trade programs, which would allow participants under a U.S. 
program to trade allowances with other programs, such as the ETS. In 
theory, linking can enhance the cost-effectiveness of the 
participating programs by enabling covered entities to take advantage 
of differences in the cost of abatement options. However, establishing 
a safety valve in one program would have implications for other linked 
programs--for example, linked countries may not be able to ensure that 
their emissions would be below a required level in a given year. 
Additionally, a price ceiling could discourage investment in research 
and development to create new energy-efficient technologies by 
limiting future profits from their sale. Moreover, some officials 
reported that price floors and ceilings are unnecessary if the initial 
cap is set correctly, using accurate, current emissions data, which 
they considered to be a better strategy for regulating prices than 
using price controls to artificially manipulate the market. 

Reporting and Monitoring: 

According to available literature and program officials, establishing 
a system to report and monitor auction activities is an important 
aspect of auction design. Effective reporting can increase the 
program's transparency and help participants make informed bidding 
decisions. In addition, monitoring auction results can help government 
agencies or designated private entities identify instances of market 
abuse and evaluate whether auctions have met established goals. 

Reporting of auction results. If auctions are used, policymakers would 
need to consider how and when to report data on auction results. 
Several program officials recommended making auction results available 
immediately after the auction. According to one official, providing 
timely and accurate data on auction results can provide covered 
entities with information on costs to use as part of their strategic 
planning efforts. In determining which data to report, program 
officials recommended that the government disclose aggregated data 
such as the quantity of allowances sold, the number of participants 
(and the fraction that won allowances), and the clearing price. RGGI 
makes auction results data available through an online program called 
CO2 Allowance Tracking System, which allows the public to download 
emissions data and relevant auction results. 

While providing timely aggregated data can serve a useful purpose, 
economic literature suggests that revealing too much information about 
auction results could inadvertently facilitate collusion or limit 
auction participation. For example, publicizing the names of auction 
winners and their respective purchases may enable entities to 
determine whether collusive agreements established prior to the 
auction were honored. In addition, program officials said that 
reporting the identity of bidders allows market participants to 
discern the patterns and strategies of others. According to a European 
Commission official, entities may choose not to participate at 
auctions if they fear that commercially sensitive information will be 
revealed through their bidding. Some program officials noted that 
while restricting access to such data may run counter to traditional 
ideas about transparency, it may serve the public's best interest to 
establish clear limits around the amount and type of auction data 

Monitoring and oversight. An auction monitoring system can help 
identify cases of market abuse, ensure that auctions comply with 
established rules, and provide information useful in evaluating and 
improving auction design. Several program officials recommended 
designating a market monitor to observe and assess activities at 
auctions and in the secondary market. The auction monitor could either 
be a private or public authority--for example, the RGGI program uses a 
private consulting firm to perform a number of market monitoring 
activities. According to a RGGI official, these activities include: 
ensuring auction rules are consistently applied in each auction, 
analyzing participant behavior and identifying any irregularities, and 
modeling the impact of potential design modifications to the program. 
The RGGI market monitor also analyzes secondary market activity, 
although the Commodity Futures Trading Commission (CFTC) is 
responsible for protecting market participants against fraud, 
manipulation, and abusive trading practices. 

In Phase I and Phase II of the ETS, individual member states have used 
different methods to monitor auction results. For example, the United 
Kingdom government manages auctions but has appointed an independent 
observer to ensure auctions are conducted in accordance with the law. 
In Austria, an energy exchange handles vetting procedures and auction 
administration while the government handles oversight. For Phase III 
of the ETS and beyond, the EU Directive requires member states to 
report to the European Commission on various aspects of auction 
outcomes, including issues related to access, price formation, and 
technical issues. In addition, the outline for the draft auctioning 
regulation from Phase III and beyond foresees the appointment of a 
single auction monitor. Respondents to the EU's consultation on Phase 
III auctioning generally favored this proposal, although some 
respondents noted efforts to curb market abuse at auctions would be 
ineffective if these efforts are not accompanied by similar efforts in 
the secondary market. 

[End of section] 

Appendix III: Allowance Sales Conducted in the EU ETS and RGGI: 

Table 2: Allowance Sales in the EU Emissions Trading Scheme as of 

Member state: Ireland; 
Method of sale: Auctions (3 total); Sale (1 total); 
Year of sale: 2006 and 2008 (auctions); 2009 (sale); 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 
2.3 (Phase I); 
0.5 (Phase II); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: 
Auction 1: $33.12; 
Auction 2: $8.65; 
Auction 3: $0.01; 
Sale: $17.94; 
Amount of revenue generated: $19.9 million. 

Member state: Hungary; 
Method of sale: Auctions (2 total); 
Year of sale: 2006 - 2007; 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 2.5 (Phase I); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: 
Auction 1: $9.34; 
Auction 2: $1.09; 
Amount of revenue generated: $12.5 million. 

Member state: Denmark; 
Method of sale: Sales on an exchange; 
Year of sale: 2006 - 2007; 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 5.0 (Phase I); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: Weighted average price: 2006-2007: $7.62; 
Amount of revenue generated: $38.3 million. 

Member state: Lithuania; 
Method of sale: Auction (1 total); 
Year of sale: 2007; 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 1.5 (Phase I); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: Auction 1: $.07; 
Amount of revenue generated: $40,915. 

Member state: United Kingdom; 
Method of sale: Auctions (7 total); 
Year of sale: 2008 - 2009; 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 7.0 (Phase II); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: Auctions 1 to 7: Between $12.87 and $19.36; 
Amount of revenue generated: $472.7 million. 

Member state: Austria; 
Method of sale: Auctions (2 total); 
Year of sale: 2009; 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 1.3 (Phase II); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: 
Auction 1: $13.66; 
Auction 2: $16.68; 
Amount of revenue generated: $6.1 million. 

Member state: Germany; 
Method of sale: Sales on an exchange; 
Year of sale: 2008 - 2009; 
Amount sold: Percentage of each member state's cap sold (or expected 
to be sold): 8.8 (Phase II); 
Amount sold: Number of allowances sold (in millions) as of 12/31/09: 
Clearing price: Weighted average price: 
2008 sales: $27.97 
2009 sales: $15.49; 
Amount of revenue generated: $1.7 billion. 

Source: GAO analysis of ETS data, obtained through interviews with 
program officials and documents from the European Commission, member 
state governments, and ETS auction administrators. 

Notes: Data as of December 31, 2009. For auctions held in Phase I, 
this figure represents the percentage of actual allowances sold; for 
auctions held in Phase II, it represents the projected amount of 
allowances to be auctioned, based on National Allocation Plans (NAP) 
submitted by each member state. The Phase II NAPs for the United 
Kingdom and Austria also indicate that unused allowances from the New 
Entrant Reserve will be auctioned; we did not include these allowances 
in our calculations. Purchasing power parities (PPP) published by the 
Organization for Economic Co-operation and Development (Main Economic 
Indicators, February 2010) were used to convert sales prices and 
revenues from euros to dollars. The gross domestic product index was 
used to adjust the resulting figures for inflation. 

[End of table] 

Table 3: Auctions Held in the Regional Greenhouse Gas Initiative 

Date of auction: 9/25/08; 
Vintage sold: 2009; 
Number of allowances auctioned (rounded): 12.6 million; 
Number of entities submitting bids: 59; 
Clearing price: $3.07; 
Amount of revenue raised (rounded): $38.6 million. 

Date of auction: 12/17/08; 
Vintage sold: 2009; 
Number of allowances auctioned (rounded): 31.5 million; 
Number of entities submitting bids: 69; 
Clearing price: $3.38; 
Amount of revenue raised (rounded): $106.5 million. 

Date of auction: 3/18/09; 
Vintage sold: 2009; 
Number of allowances auctioned (rounded): 31.5 million; 
Number of entities submitting bids: 50; 
Clearing price: $3.51; 
Amount of revenue raised (rounded): $117.2 million. 

Date of auction: 3/18/09; 
Vintage sold: 2012; 
Number of allowances auctioned (rounded): 2.2 million; 
Number of entities submitting bids: 20; 
Clearing price: $3.05; 
Amount of revenue raised (rounded): (Combined with above entry). 

Date of auction: 6/17/09; 
Vintage sold: 2009; 
Number of allowances auctioned (rounded): 30.9 million; 
Number of entities submitting bids: 54; 
Clearing price: $3.23; 
Amount of revenue raised (rounded): $104.2 million. 

Date of auction: 6/17/09; 
Vintage sold: 2012; 
Number of allowances auctioned (rounded): 2.2 million; 
Number of entities submitting bids: 13; 
Clearing price: $2.06; 
Amount of revenue raised (rounded): (Combined with above entry). 

Date of auction: 9/9/09; 
Vintage sold: 2009; 
Number of allowances auctioned (rounded): 28.4 million; 
Number of entities submitting bids: 46; 
Clearing price: $2.19; 
Amount of revenue raised (rounded): $66.3 million. 

Date of auction: 9/9/09; 
Vintage sold: 2012; 
Number of allowances auctioned (rounded): 2.2 million; 
Number of entities submitting bids: 12; 
Clearing price: $1.87; 
Amount of revenue raised (rounded): (Combined with above entry). 

Date of auction: 12/2/09; 
Vintage sold: 2009; 
Number of allowances auctioned (rounded): 28.6 million; 
Number of entities submitting bids: 62; 
Clearing price: $2.05; 
Amount of revenue raised (rounded): $61.6 million. 

Date of auction: 12/2/09; 
Vintage sold: 2012; 
Number of allowances auctioned (rounded): 1.6 million; 
Number of entities submitting bids: 8; 
Clearing price: $1.86; 
Amount of revenue raised (rounded): (Combined with above entry). 

Source: GAO analysis of RGGI auction reports issued by Potomac 
Economics, RGGI's independent market monitor. 

[End of table] 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

John B. Stephenson, (202) 512-3841 or 

Staff Acknowledgments: 

In addition to the contact named above, Michael Hix (Assistant 
Director), Cindy Gilbert, Robert Grace, Richard Johnson, Jessica 
Lemke, Micah McMillan, Benjamin Shouse, Jeanette Soares, Ardith A. 
Spence, and Kiki Theodoropolous made key contributions to this report. 

[End of section] 


[1] The six primary greenhouse gases include carbon dioxide, methane, 
and nitrous oxide, as well as three types of synthetic gases: 
hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. 

[2] Programs that cover emissions other than carbon dioxide may 
quantify these emissions in terms of carbon dioxide equivalent. Carbon 
dioxide equivalents provide a common standard for measuring the 
warming efficiency of different greenhouse gases and are calculated by 
multiplying the emissions of the non-carbon dioxide gas by its global 
warming potential, a factor that measures its heat-trapping ability 
relative to that of carbon dioxide. 

[3] GAO, Climate Change Policy: Preliminary Observations on Options 
for Distributing Emissions Allowances and Revenue under a Cap-and-
Trade Program, [hyperlink,] 
(Washington, D.C.: Aug. 4, 2009). See also: Auctioning under Cap-and-
Trade: Design, Participation, and Distribution of Revenues Before the 
Senate Comm. on Finance, 111th Cong. (2009) (statement of Douglas 
Elmendorf, Director, Congressional Budget Office (CBO)). CBO notes 
that the actual value of allowances would depend on the design of the 
cap-and-trade program. 

[4] For example, a firm may increase its emissions in pre-regulation 
years to drive up its emissions baselines and increase its allowance 

[5] GAO, International Climate Change Programs: Lessons Learned from 
the European Union's Emissions Trading Scheme and the Kyoto Protocol's 
Clean Development Mechanism, [hyperlink,] (Washington, D.C.: Nov. 18, 

[6] We do not assess nongovernmental sales as part of this report. 
Nongovernmental sales include the secondary market and sales or 
auctions by noncovered entities that receive allowances from the 
government entity administering the cap-and-trade program. For 
example, proposed legislation allocates some allowances to local 
distribution companies, state natural resource agencies, Indian tribes 
and other noncovered entities, and authorizes them to sell, auction, 
or retire the allowances. 

[7] The three previous products are: GAO, Climate Change Trade 
Measures: Considerations for U.S. Policy Makers, [hyperlink,] (Washington, D.C.: July 8, 
2009); GAO, Climate Change Trade Measures: Estimating Industry 
Effects, [hyperlink,] 
(Washington, D.C.: July 8, 2009); and GAO-09-950T. 

[8] For information on future large-scale auctions, see [hyperlink,

[9] For more information on the EU ETS, see GAO-09-151. 

[10] At the time of this report, Germany had committed to sell 40 
million allowances per year--or 8.8 percent of all the allowances it 
will issue in Phase II--the most of any EU ETS member state since the 
inception of the program. According to program officials, Germany will 
also sell 1 to 1.5 million allowances to cover administrative costs. 

[11] Electric power and certain industrial installations were 
originally covered under Phase I of the program. The scope of the ETS 
was expanded in 2009 to include other installations and certain 
flights of aircraft operators from or to EU airports. In 2012 and 
subsequent trading periods, 15 percent of the total allowances 
available for distribution to aircraft operators will be auctioned. 

[12] Any auction, whether conducted by a member state or a centralized 
platform, must be open to covered entities throughout the EU because 
the ETS directive, or law, requires that all covered entities have 
fair, full, and equitable access to auctions in Phase III and beyond. 

[13] In forward contracts, the specific terms are negotiated between 
buyers, whereas futures contracts refer to standardized agreements 
available only through exchanges. 

[14] The price of allowances is affected by a number of factors, 
including the stringency of the cap, energy prices, and weather 

[15] In the EU ETS, sellers that participate in the secondary market 
include banks, brokers, covered entities, and investors. 

[16] In 2010, Germany began auctioning rather than selling allowances. 

[17] The European Climate Exchange trades two types of carbon credits: 
EU ETS allowances and credits issued through the Clean Development 
Mechanism, a carbon offset program established under the Kyoto 
Protocol. The European Energy Exchange operates market platforms for 
both types of credits, as well for power, natural gas, and coal. 

[18] H.R. 2454, 111th Cong. (2009). 

[19] In some cases, price volatility may convey information about 
changes in market fundamentals. For example, the release of verified 
data in Phase I of the EU ETS indicated that the overall cap was 
likely to exceed total emissions. Prices fell in response, which 
established that the market was functional. 

[20] Different ways may exist for determining the clearing price in a 
uniform-price auction. For example, the price may be the lowest bid 
price at which all available allowances received a bid, or the highest 
bid that is rejected. 

[21] While the terms "sealed-bid" and "single-round" are often used 
interchangeably, sealed-bid auction procedures may also be used in 
multiple-round formats. For example, in a sealed-bid, multiple-round 
auction, participants could submit a set of bids in advance of the 
auction and the bids would be revealed over time as the auction 

[22] If greenhouse gases other than carbon dioxide are covered under 
the program, allowances would likely represent one unit of carbon 
dioxide equivalent. 

[23] Burtraw, Dallas, Jacob Goeree, Charles A. Holt, Erica Myers, 
Karen Palmer, and William Shobe, "Collusion in Auctions for Emissions 
Permits," Resources for the Future Discussion Paper 08-36. 

[24] However, some state regulations required the uniform-price, 
single-round format for the first auction, but then authorized the 
auction administrator to choose among (1) the uniform-price, single- 
round format; (2) the ascending-price, multiple-round format; or (3) 
other formats for subsequent auctions. 

[25] Cramton, Peter and Suzi Kerr, "Tradeable Carbon Permit Auctions: 
How and Why to Auction not Grandfather," Energy Policy (30) 2002, pp. 

[26] In the ETS, individual member states chose to hold national 
auctions in Phases I and II. Because all states participating in RGGI 
chose centralized auctions, we did not select a sample of RGGI states. 

[27] According to some program officials, creditworthiness may be less 
of a concern if bidders are required to post collateral covering 100 
percent of their bids. 

[28] Under United Kingdom Treasury rules, primary participants must 
prevent the disclosure of confidential information they receive from 
indirect bidders to their employees responsible for preparing or 
submitting bids on the primary participant's behalf. 

[29] The United Kingdom allows primary participants to pay a 
discounted clearing price--5 Euro cents less per allowance--while 
charging its indirect bidders the actual clearing prices. 

[30] Ireland's third and final auction did not have a reserve price. 

[31] CBO, Policy Options for Reducing CO2 Emissions (February 2008). 

[End of section] 

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