As Europe transitions to clean energy, reverse auctions have emerged as a promising policy instrument to incentivize bioenergy with carbon capture and storage (BECCS)—a technology that can deliver carbon dioxide removal (CDR) in addition to renewable energy. However, designing auctions for BECCS involves navigating complex trade-offs and goal conflicts.
Sweden, a leader in BECCS deployment, has introduced a €3.6 billion reverse auction scheme to facilitate market entry of BECCS operators. Drawing on 35 expert interviews, we explore the preferences of prospective BECCS operators, policymakers, and regulators regarding auction design. This analysis identifies at least four key dilemmas that policymakers must address:
Balancing ambition and feasibility: The government aims to implement BECCS by 2030, but operators fear the “winner’s curse” of overbidding and costly implementation.
Allocating contracts at the margin: Efficiently matching auction caps to BECCS supply without driving up costs is challenging due to economies of scale.
Designing compliance mechanisms: Strict penalties may improve effectiveness but undermine participation, while soft rules risk non-performance.
Integrating with carbon markets: Allowing BECCS operators to sell carbon removal credits could generate revenue, but risks undermining the auction’s climate integrity.
These dilemmas illustrate the complexity of responsibly incentivizing BECCS—a technology crucial for Europe’s climate transition, but one fraught with potential goal conflicts. As policymakers navigate this uncharted territory, interim policy solutions like reverse auctions can provide valuable lessons to inform future large-scale BECCS support schemes.
Auction Structure and Mechanisms
Reverse auctions create a competitive marketplace where prospective BECCS operators submit bids to sell their services to the government (the “auctioneer”). This pay-as-bid format rewards winners with long-term contracts at their quoted price per ton of captured and stored carbon. Compared to traditional renewable energy auctions, BECCS poses unique challenges.
Unlike renewable electricity, BECCS does not generate a readily tradable product. Its operating costs are also significant, whereas renewable energy is dominated by upfront investment. This makes BECCS more akin to payments for ecosystem services than a traditional commodity auction. Furthermore, the technical potential for BECCS is concentrated in relatively few large industrial facilities, limiting the pool of prospective bidders.
Our interviews reveal that prospective BECCS operators are cautious about participating in early auctions, fearing the “winner’s curse” of bidding too low and being unable to deliver. Smaller players with less-developed BECCS plans are more willing to bid, but the auctioneer worries their proposals may lack feasibility. Striking the right balance between participation and feasibility is crucial for an effective and efficient auction design.
Renewable Energy Policy Objectives
Many countries, including Sweden, have legislated net-zero emissions targets that necessitate widespread CDR. BECCS is often cited as a key CDR technology, with modeled pathways showing it could remove hundreds of gigatons of CO2 by 2050. However, the lack of policy incentives has stifled BECCS deployment to date.
The Swedish government’s €3.6 billion BECCS reverse auction scheme aims to catalyze the market and meet the country’s residual emissions reduction targets for 2045. Policymakers see auctions as a way to reveal BECCS costs and spur innovation, while providing a stable investment environment for early movers.
Potential Conflicts in Reverse Auction Design
Auction theory suggests that competitive bidding can drive cost-efficiency, but our interviews suggest auction design must carefully balance this with other policy priorities. Some respondents advocate for technology-neutral auctions open to diverse CDR methods, while others prefer targeting BECCS specifically to concentrate limited resources.
Integrating BECCS into voluntary carbon markets poses another dilemma. Allowing BECCS operators to sell carbon removal credits could generate critical revenue, but risks undermining the auction’s environmental integrity if not properly governed.
Stakeholder Interests and Perspectives
Prospective BECCS operators seek auction designs that minimize risks and uncertainty, such as long contract periods, flexible delivery schedules, and moderate penalties. In contrast, policymakers aim to maximize cost-effectiveness and environmental integrity, which may require stricter prequalification criteria, compliance rules, and limits on carbon market integration.
Reconciling these divergent preferences is essential for a feasible and effective auction. Overemphasizing operator preferences could undermine efficiency, while prioritizing policymaker objectives risks deterring participation.
Auction Efficiency and Competitiveness
A key challenge is ensuring sufficient competition to drive down costs, given the limited pool of prospective BECCS bidders. Our interviews suggest that early auctions may struggle to attract enough serious players, as larger operators adopt a “wait-and-see” approach to learn from first movers.
The auctioneer must also grapple with how to efficiently allocate contracts at the margin of the auction cap. BECCS benefits significantly from economies of scale, making it difficult to scale down bids linearly. Overly rigid volume targets risk efficiency losses, but flexible approaches raise concerns about environmental integrity.
Sustainability and Environmental Impacts
While BECCS can deliver net-negative emissions, concerns exist around its sustainability impacts, such as biodiversity loss and food security risks from competing biomass demand. Auction design must balance climate objectives with these broader sustainability considerations, including through eligibility criteria and life-cycle assessment requirements.
Policy Integration and Complementarity
BECCS reverse auctions do not operate in isolation. Policymakers must consider how they interact with existing and emerging energy and climate policies, such as the EU Emissions Trading System, renewable energy incentives, and carbon farming initiatives. Coordinating across jurisdictions is also crucial, as BECCS supply chains often span national borders.
Flexibility and Adaptive Policymaking
Given the evolving nature of BECCS technology and markets, auction design should incorporate flexibility to adapt to changing circumstances. This could include dynamic volume caps, provisions for mid-contract adjustments, and robust monitoring and evaluation frameworks to inform future policy iterations.
By exploring the potential goal conflicts and design dilemmas inherent in BECCS reverse auctions, this article highlights the challenges and importance of responsibly incentivizing emerging carbon removal technologies. As Europe and other regions strive to meet ambitious climate targets, interim policy solutions like reverse auctions can yield valuable insights to guide the development of large-scale, sustainable BECCS support schemes.
To learn more about Europe’s shift to clean energy, visit the European Future Energy Forum.