The Inside View of Carbon and Energy Auctions

They work.

In the first carbon auctions conducted last September by RGGI Inc., the administrative body for the East Coast’s Regional Greenhouse Gas Initiative, the auction yielded 12.6 million allowances for $3.07 per allowance, according to World Energy, which provides the underlying software and services for the auction. A second auction in December yielded 31.5 million allowances at $3.38 per allowance. At another auction on March 23, 31.5 million allowances were auctioned at $3.51 per allowance. The March auction also saw the sale of 2.2 million 2012 vintage allowances for $3.05 per allowance.

In all, the the March auction raised $117 million for energy efficiency and other projects. (The money goes to the ten participating states.)

These kind of results are helping bolster the argument for cap-and-trade programs over carbon taxes, said Phil Adams, World’s president. RGGI is an example of cap and trade. Representatives from several governments have already contacted World about auctions. People who helped implement RGGI now work in the Obama administration.

Cap and trade has an advantage over taxes in that the price is less arbitrary, he argued. (Canada, Al Gore and others, though, say a tax is the way to go.)

World also conducts energy auctions. Manufacturers and other large organizations state what they want to buy and independent power producers bid on the deals. Buyers can see the identity of the sellers, but the sellers don’t know who else is bidding. They just see the latest quotes.

Despite the fact that the contracts can total well into the millions, you see a lot of the same psychology you do on eBay. The bidding will proceed on a moderate basis until the last minutes of the auction, which last an hour. Then it plummets as sellers try to undercut each other. Some sellers have multiple log-ins to better react to incoming bids from competitors.

Buyers are not obligated to buy any of the offers “but we close almost every deal,” said Adams.