At a glance, it seems that the most influential determinant of market prices is the auction price mechanism of choice – it seems sensible, then, to recommend that systems such as the RGGI use a second price auction over their current mechanism, which is a uniform clearing price auction.

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This is because the higher, more diverse prices that we get from second price auctions (due to the incentives associated with it) will allow policymakers to make more progress towards carbon emission reduction, holding all other policy variables constant. It would allow policymakers to not only raise more revenue but get closer to efficient allocation based on the marginal cost structure of carbon emitters – the hope would be to price out the emitters of carbon with the lowest combination of productivity and efficiency.

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A potential side effect with mixed outcomes would be the way this might shape the distribution of participants in the relevant carbon-emitting industries (in the case of the RGGI, power generation). If nothing else, it could be expected to shift capital expenditures towards green energy generation technologies and manufacturing processes whose marginal cost would be relatively higher without the floor set by carbon pricing. Such an effect would be similar to the effects we now see with minimum wages – as minimum wages increase, automation increases since the relative cost of automation per unit of output fall and jobs, as well as hours, are cut.

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The pertinence of this in the context of climate change cannot be overstated, as climate change has evolved from a distinct possibility to a dangerous reality.