Auction mechanisms for allocating subsidies for carbon emissions reduction: an experimental investigation

Abstract

One method to reduce greenhouse gas emissions is to subsidize emissions-reducing activities, and allocating such subsidies through auctions is an emerging mechanism. In a controlled experimental market setting, we conduct a laboratory experiment to compare the effects of a variety of auction mechanisms for allocating subsidies in an effort to reduce carbon emissions in China. In addition to the conventional auction mechanisms, we place particular focus on testing the performance of the auction mechanism proposed by Erik Maskin (Notes on auctions for pollution reduction. In: Keynote Speech at the 18th annual conference of European Association for Environmental and Resource Economists, Rome, 2011). We find that while the Maskin auction mechanism spends the most from a fixed subsidy budget and its emissions reduction is among the largest, its per-unit emissions reduction cost is higher than that of discriminatory and uniform-price auction mechanisms. Furthermore, from the government’s perspective, the Maskin auctions exhibit strong improvement tendency with repeated auctions.