Working Paper No. 2023-17 - The Economics of Coal Phaseouts: Auctions as a Novel Policy Instrument

Since Germany is the only country till date to have implemented a coal phaseout auction, we use it to analyse the merits and demerits of the policy. [...] Auctions, negotiations and other incentives: when to use what policy Based on the local context, the design of a coal closure auction should ensure enough competition by calibrating the geographic scope, reviewing the eligibility criteria, deciding if the auction is broken into multiple rounds or not, and by thinking about the diversity of players (including their ownership structures). [...] 5 Since Germany is the only country in the world till date to have implemented a coal phaseout auction, we use it to analyse the merits and demerits of the policy, with an acknowledgement that more evidence is likely needed to establish the feasibility of such a scheme and not all lessons will be transferable across contexts. [...] Yet due to the nature of policy formulation and adoption, there is an imperative to understand the lessons that can be drawn from the first use-case of a coal phaseout auction, especially because there are other contexts with both private ownership and sufficient competition. [...] The task is less so around finding the “optimal” quantity of coal in the system, and instead, more about how to reach externally-imposed closure targets with compensation that reflects the true opportunity cost of early retirement, minimises rent-seeking, and which explicitly prices in 10 rehabilitation to workers and degraded lands.