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An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets

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  • Perkis, David F.
  • Cason, Timothy N.
  • Tyner, Wallace E.

Abstract

Tradable emissions permits have been implemented to control pollution levels in various markets around the world and represent a major component of legislative efforts to control greenhouse gas (GHG) emissions in the United States. Because permits are supplied for a fixed level of pollution, allowing the market for permits to determine the price, there is a desire for price control mechanisms which would protect firms otherwise susceptible to price spikes caused by fluctuations in the demand for pollution abatement. We test permit markets in an experimental laboratory setting to determine the effectiveness of several price control mechanisms. Evidence suggests that both permit supply adjustments and traditional price ceilings (hard ceilings) effectively limit elevated prices in this setting. In contrast, reserve auctions (associated with soft ceiling designs) do not consistently control prices, especially when a minimum reserve permit price is applied. Furthermore, the grandfathering of permits allows permit sellers to realize significant welfare gains at the expense of buyers under a soft ceiling policy. Of the two ceiling options, our results point towards a hard ceiling as the preferred mechanism for controlling short term price increases.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124096.

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Date of creation: 2012
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Handle: RePEc:ags:aaea12:124096

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Keywords: Tradable Emissions Permit Market; Price Controls; Hard Ceiling; Soft Ceiling; Experimental Economics; Environmental Economics and Policy; Institutional and Behavioral Economics; Resource /Energy Economics and Policy;

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  1. John K. Stranlund & James J. Murphy & John M. Spraggon, 2011. "An Experimental Analysis of Compliance in Dynamic Emissions Markets," Working Papers 2011-01, University of Alaska Anchorage, Department of Economics.
  2. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2009. "A Symmetric Safety Valve," Discussion Papers dp-09-06, Resources For the Future.
  3. Noussair, Charles N & Plott, Charles R & Riezman, Raymond G, 1995. "An Experimental Investigation of the Patterns of International Trade," American Economic Review, American Economic Association, vol. 85(3), pages 462-91, June.
  4. Brian C. Murray & Richard G. Newell & William A. Pizer, 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," NBER Working Papers 14258, National Bureau of Economic Research, Inc.
  5. Jacob K. Goeree & Charles A. Holt & Karen Palmer & William Shobe & Dallas Burtraw, 2009. "An experimental study of auctions versus grandfathering to assign pollution permits," IEW - Working Papers 429, Institute for Empirical Research in Economics - University of Zurich.
  6. Timothy N. Cason & Charles Noussair, 2007. "A Market With Frictions In The Matching Process: An Experimental Study," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 665-691, 05.
  7. Harrison Fell & Richard Morgenstern, 2010. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(2), pages 275-297, October.
  8. Timothy N. Cason & Lata Gangadharan, 2004. "Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking," Department of Economics - Working Papers Series 917, The University of Melbourne.
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  10. Isaac, R. Mark & Plott, Charles R., . "Price Controls and the Behavior of Auction Markets: An Experimental Examination," Working Papers 253, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Fankhauser, Samuel & Hepburn, Cameron, 2010. "Designing carbon markets. Part I: Carbon markets in time," Energy Policy, Elsevier, vol. 38(8), pages 4363-4370, August.
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