Reverse Auctions to Procure Negative Emissions at Industrial Scale

Dallas Burtraw (), Charles Holt (), Åsa Löfgren () and William Shobe ()
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Dallas Burtraw: Resources for the Future, Washington, DC, USA
Charles Holt: University of Virginia, Charlottesville, VA, USA
Åsa Löfgren: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
William Shobe: University of Virginia, Charlottesville, VA, USA

No 854, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Many climate solutions including carbon dioxide removal (CDR) technologies require investments in capital intensive technologies that require large capacity investments and exhibit modest unit costs. Governments seeking to achieve net zero goals may invest directly in CDR to procure negative emissions credits to offset emissions in hard-to-abate sectors such as agriculture. In a procurement auction for a declining cost industry, the optimal allocation will generally require all winning bidders operating at full capacity. Because of the lumpy nature of investments, this may not fit within the government’s budget, leaving one or more winning bidders at the margin, operating at less than full capacity, and consequently with higher average costs. Protection can be provided to the marginal bidder by letting bids specify a range of acceptable quantities up to full capacity. The auction can be executed with sealed bids (specifying prices with associated minimum quantities) or by having the proposed bid price be lowered sequentially in a “clock auction” with quantity intervals specified by bidders at the current clock price. We consider the performance of sealed bid and clock auctions, in the presence of 1) a fixed government procurement budget, 2) “common value” uncertainty about the true per-unit production cost, and 3) the presence of a large, fixed cost. Laboratory experiment simulations with financially motivated human subjects are valuable for testing and developing auction designs that have never been used before, without relying on theoretical properties that depend on strong assumptions of perfect cost information and “truthful bidding.” Preliminary experiment results indicate that winner’s curse effects (bidder losses) are infrequent in both auction formats (clock and sealed bid), but the clock tends to restrict bidder profits in a manner that reduces the average cost for the buyer of the “units” representing CDR. Our experiments are informed by the projected use of auctions by the government of Sweden to procure carbon capture and sequestration from its domestic wood products and energy industry.

Keywords: Carbon dioxide removal (CDR); Procurement auctions; Common value uncertainty; Capital-intensive technologies (search for similar items in EconPapers)
JEL-codes: C92 D44 H57 Q54 Q55 Q58 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2025-04-28
New Economics Papers: this item is included in nep-agr, nep-des, nep-ene, nep-env, nep-exp and nep-res
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