A Mechanism Design for Managing Emissions in Energy Supply Sector

The strategic design for a program for managing the commons involves devising a scheme where those regulated are not trapped into inefficient equilibrium of moral hazardous behavior. This paper studies the auctionmechanism for allocating allowance or licenses for CO2 emission and also pricing transferable allowance. For the sake of clear presentation, we use a behavioral model of an electricity supplier firm to define key ingredients in the auction mechanism. Program implementation is evaluated by simulating the firm’s response to various levels of constraint under the program.