A Pareto Optimal Auction Mechanism for Carbon Emission Rights

Abstract EN

The carbon emission rights do not fit well into the framework of existing multi-item auction mechanisms because of their own unique features.

This paper proposes a new auction mechanism which converges to a unique Pareto optimal equilibrium in a finite number of periods.

In the proposed auction mechanism, the assignment outcome is Pareto efficient and the carbon emission rights’ resources are efficiently used.

For commercial application and theoretical completeness, both discrete and continuous markets—represented by discrete and continuous bid prices, respectively—are examined, and the results show the existence of a Pareto optimal equilibrium under the constraint of individual rationality.

With no ties, the Pareto optimal equilibrium can be further proven to be unique.