Appendix 1 – illustrative example of the subsidised auction mechanism
One of the possible mechanisms for allocating deforestation permits discussed on page 15 is to auction them on a subsidised basis. Under this approach permits would be auctioned, with all buyers paying the same price. But the government would meet the cost of a fixed number of the permits, thereby reducing the average cost of the permits sold. The price paid per permit would depend on the total number of permits wanted by industry. This would lead to a steadily increasing price schedule that ultimately trends towards the full market value of permits as the number of permits provided increases (see table).
Table – Illustrative Auction Supply Schedule
| Number of Permits Sold (m) | 1 |
… |
21 |
22 |
23 |
24 |
25 |
… |
|---|---|---|---|---|---|---|---|---|
| Price Per Permit | $- |
… |
$- |
$0.72 |
$1.38 |
$1.99 |
$2.55 |
… |
This illustrative example is based on: a price of $15.92 per tonne of CO2; each permit allowing emissions of 1 tonne of CO2; and the government meeting the cost of the first 21m permits.
Under the subsidised auction approach, the government would publish the permit “supply schedule” in advance of the auction. During the auction itself, parties would bid the total number of permits they were willing to buy for a given permit price. During each round of the auction the price would be increased, and new bids received, until the aggregate number of bids received for permits at a given price equalled the number of permits the government was willing to supply under the schedule. The supply schedule, and an illustrative progression of bids is shown in the figure below.
Figure – Illustrative Outcome of Subsidised Auction
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Sustainable Land Management and Climate Change
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