Assessing the impact of different auction-based CO2 allowance allocation mechanisms

Auction based CO₂ allowance allocation is a fundamental element of all cap-and-trade programs that are being discussed around the world. Multi-unit auctions usually follow a uniform or discriminatory pricing mechanism. Each of the auction mechanisms result in different strategic behavior by bidders. In this paper, we develop a game-theoretic model to assess the impact of these auction mechanisms on cap-and-trade and electricity markets. The game-theoretic model is solved using a nested two-stage diagonalization algorithm. The methodology is demonstrated on power network data from northern Illinois electricity market and results are discussed.