  The combustion of coal, the most polluting form of energy, must be
significantly curtailed to limit global average temperature increase to well
below 2 degrees C. The effectiveness of carbon pricing is frequently undermined
by sub-optimally low prices and rigid market structures. Consequently,
alternative approaches such as compensation for the early closure of coal-fired
power plants are being considered. While bilateral negotiations can lead to
excessive compensation due to asymmetric information, a competitive auction can
discover the true cost of closure and help allocate funds more efficiently and
transparently. 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, drawing comparisons with other countries that have phased out coal
through other means. The German experience with coal phaseout auctions
illustrates the necessity of considering additionality and interaction with
existing climate policies, managing dynamic incentives, and evaluating impacts
on security of supply. While theoretically auctions have attractive properties,
in practice, their design must address these concerns to unlock the full
benefits. Where auctions are not appropriate due to a concentration in coal
plant ownership, alternative strategies include enhanced incentives for
scrappage and repurposing of coal assets.
