New research from MIT Sloan School of Management suggests that adopting a pay-as-bid auction model for managing carbon emissions could increase government revenue while encouraging companies to transition to greener technologies.
Unlike uniform-price auctions, where all winning bidders pay the lowest successful bid, pay-as-bid auctions require each buyer to pay their individual bid price.
Associate professor Negin Golrezaei, along with MIT PhD student Rigel Galgana, explored this approach in their study, “Learning in Repeated Multi-Unit Pay-As-Bid Auctions,” published in Manufacturing & Service Operations Management.
According to Golrezaei, aligning permit prices with the true societal cost of carbon—estimated at $190 per ton by the U.S. Environmental Protection Agency (EPA)—can make carbon markets more effective in driving emissions reductions.
“By adopting a market-driven approach like pay-as-bid auctions, we could better align permit prices with the true societal cost of carbon,” Golrezaei said.
The study builds on Golrezaei’s earlier research into auction dynamics and introduces an algorithm that helps participants navigate pay-as-bid auctions effectively.
The algorithm addresses challenges such as repeated interactions among participants, including industries like power generation and aviation. These interactions influence market dynamics and can create opportunities for collusion.
By overcoming these challenges, the data-driven model provides a pathway for companies to learn and refine bidding strategies over time.
Relevant: World Bank: Global Carbon Pricing Revenue Tops $100 Billion But Falls Short On Impact
Golrezaei noted parallels between this model and shifts in the online advertising market, where first-price auctions (a single-unit equivalent of pay-as-bid auctions) have increased revenues compared to second-price auctions.
The research underscores the potential of pay-as-bid auctions not only in carbon markets but also across sectors like electricity and telecommunications, where multi-unit auctions generate billions of dollars annually.
Read more: Goldman Sachs Sees Major Shift In EU Carbon Market Prices
