The Tiered Clinching Auction with Applications to Carbon Offset Markets

2026-07-26

AI Summary

This study addresses inefficiencies in carbon offset markets—stemming from low liquidity, product heterogeneity, fragmented certification, and the absence of a unified trading mechanism—which obscure price signals and impede optimal allocation. To resolve these issues, the paper proposes a tiered clock auction mechanism tailored for goods with ordered quality tiers, extending the Ausubel auction to settings with graded quality attributes. This novel design accommodates bidders with minimum quality thresholds and diminishing marginal utility, a configuration not previously supported. By integrating VCG pricing with a polynomial-time algorithm, the mechanism achieves Pareto-efficient allocations under private values and specific preference assumptions, while rendering truthful bidding a weakly dominant strategy. The approach thus ensures both incentive compatibility and computational tractability, offering an efficient solution applicable not only to carbon offsets but also to other markets featuring vertically differentiated goods.

Abstract

Voluntary carbon offsetting is a strategy which has been pursued globally by corporations to reduce their effective carbon emissions. Carbon offset markets currently suffer from low liquidity: offsets are highly heterogeneous, the landscape of accreditation is fragmented, and the market lacks a centralized trading infrastructure which would provide clear demand and price signaling to producers and buyers of offsets. In this paper, we propose an ascending auction mechanism which can be applied to the sale of carbon offsets. It generalizes Ausubel's clinching auction to a setting with items of tiered quality. The central idea behind the clinching mechanism is that bidders are allocated items when their opponents' demand drops below the supply. This is generalized to multiple nested submarkets where clinching can occur in the tiered case. Assuming that bidders have a minimum quality level that they will accept but are indifferent to quality beyond that, along with having decreasing marginal utility, we obtain that the auction generates the efficient outcome and charges VCG prices. As a result, sincere bidding is a weakly dominant strategy given private values. Moreover, the auction can be implemented in polynomial time. Beyond offset markets, this auction can be applied to any market where items can be ordered on a scale and bidders have a cutoff point for desiring items on the scale, such as hotel room bookings, concert ticketing and sponsored search auctions.

Problem

• carbon offset markets
• low liquidity
• heterogeneous items
• fragmented accreditation
• centralized trading infrastructure

Innovation

• tiered clinching auction
• carbon offset markets
• VCG pricing
• heterogeneous goods
• ascending auction