The European Directive on the EU ETS allows governments to auction up to 10% of the allowances issued in
phase II 20082012, without constraints being specified thereafter. This article reviews and extends the long-
standing debate about auctioning, in which economists have generally supported and industries opposed a
greater use of auctioning. The article clarifies the key issues by reviewing six traditional considerations,
examines several credible options for auction design, and then proposes some new issues relevant to auctioning.
It is concluded that greater auctioning in aggregate need not increase adverse competitiveness impacts, and
could in some respects alleviate them, particularly by supporting border-tax adjustments. Auctioning within
the 10% limit might also be used to dampen price volatility during 20082012 and, in subsequent periods, it
offers the prospect of supporting a long-term price signal to aid investor confidence. The former is only possible, however, if Member States are willing to coordinate their decision-making (though not revenue-raising) powers in defining and implementing the intended pricing mechanisms.
Type: Final paper