Enhancing Circular Economy Through Utilizing the Vickrey Price Auction for Carbon Permit Allocation

ABSTRACT Carbon pricing is crucial to advancing a circular economy by internalizing the environmental costs of emissions. Governments often use auctions to distribute carbon permits. This article applies the Vickrey pricing auction to carbon permit allocation for the first time in the literature. We show that it encourages truthful bidding and efficiently allocates permits based on true valuations. This contrasts with the first‐price auction, used in the European Union Emissions Trading System and the California Cap‐and‐Trade Market, where bidders are incentivized to misreport their bids. Our analysis demonstrates that the Vickrey pricing auction enhances market transparency, eliminates manipulation, and improves the efficiency of carbon permit allocation. We discuss the implications for policymakers and stakeholders in designing carbon‐pricing policies to combat climate change.