The total quantity control and trading of carbon emission permits (CEPs) are important means to promote the development of a low-carbon economy, and the key is the initial allocation of the CEPs. For the initial allocation problem of CEPs in China, we analyze the disadvantages of the existing free allocation method, namely, that it cannot stimulate the polluters to declare their real marginal-cost information and so it is difficult to achieve effectiveness in resource allocation. Considering these disadvantages, we design an incentive auction mechanism for allocating CEPs based on the theory and methods of a divisible-good auction, to achieve the optimal supply strategy of the government and the equilibrium bidding strategies of polluters. The theoretical proof shows that this auction mechanism has properties such as stimulation of information and validity of allocation.The auction mechanism is applied to the problem of CEP allocation in fourteen cities in the Hanjiang River Basin in China. From the allocation results of this application example, we make some suggestions for improving the implementation of the CEP trading system and the design of future environmental policy in a low-carbon economy.
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