The use of auction revenue from emissions trading systems

Putting a price on carbon is a central part of mitigation pathways. However, the political acceptability of an emissions trading system (ETS) can be challenging because the benefits of mitigation can be diffuse and the costs for specific stakeholders can be high. One way to increase the political and social acceptability is through the use of revenue from auctioning allowances. Revenue can be directed to projects that generate tangible benefits that can be directly associated with the ETS, such as installing solar panels or expanding public transport networks. In addition, revenue can also help address equity concerns for households or communities that may result from the introduction of a carbon price, such as increasing energy bills. Furthermore, it can be used to seed investment in capital-intensive solutions such as energy efficiency or emerging technologies such as electric vehicles. Finally, reinvestment of auction proceeds can generate jobs and economic benefits directly to local economies.

This paper uses real-world examples and explores how auctioning revenue can help to fund additional climate and energy programs and compensate vulnerable groups. The paper examines the use of auction revenue of existing ETSs which auction their allowances. The findings indicate that how jurisdictions use the revenue stream of auctioning their allowances will likely vary on a case-by-case basis. Most jurisdictions have used the revenue to fund additional climate and energy programs as part of a comprehensive approach to climate change that strengthens the positive climate impact of an ETS. A smaller share of revenue has gone to assist low-income households or disadvantaged communities.