Auctioning of CO2 Emission Allowances in Phase 3 of the EU Emissions Trading Scheme

The Climate action and renewable energy package proposed by the European Commission in the beginning of 2008 suggests auctioning as basic principle for allocation for the upcoming third trading phase of the EU Emissions Trading Scheme that runs from 2013 to 2020. Overall, it is estimated that at least two third of the total quantity of allowances will be auctioned in 2013, to be increased to 100 % by 2020. In this paper, we emphasize the importance of a properly chosen auction design as the significantly higher auction share, compared to the past and current trading phase, is expected to yield a thin secondary market for CO2 allowances. We elaborate main criteria that a viable auction design is supposed to fulfil and propose a specific auction design for the third trading phase. The auction we recommend is a simultaneous dynamic uniform double auction.