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Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without nonregulated companies

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  • Marc Chesney
  • Luca Taschini
  • Mei Wang
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    Abstract

    This paper examines the investment strategies of regulated companies in irreversible abatement technologies and the environmental achievements of the system in an inter-temporal cap-and-trade market using laboratory experiments. The experimental analysis is performedunder varying market structures: firstly, in a market where there are exclusively regulatedcompanies and then in a market with the inclusion of subjects not liable for compliance withenvironmental regulations. In line with theoretical models on irreversible abatement investment, the paper shows that regulated companies trade permits at a premium. At the same time, steep fixed per unit penalty for excess emissions effectively prompt investments in irreversible abatement technologies. Further, the paper shows that by contributing to the permit demand and supply, the non-regulated companies improve the compliance rate and facilitate the exchange of permits helping the system to achieve a zero-excess permit position.

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    Bibliographic Info

    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 41.

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    Date of creation: Mar 2011
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    Handle: RePEc:lsg:lsgwps:wp41

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    1. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
    2. Wråke, Markus & Myers, Erica & Mandell, Svante & Holt, Charles & Burtraw, Dallas, 2008. "Pricing Strategies under Emissions Trading: An Experimental Analysis," Discussion Papers dp-08-49, Resources For the Future.
    3. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120.
    4. Chao, Hung-Po & Wilson, Robert, 1993. "Option Value of Emission Allowances," Journal of Regulatory Economics, Springer, vol. 5(3), pages 233-49, September.
    5. John Stranlund & Christopher Costello & Carlos Chávez, 2005. "Enforcing Emissions Trading when Emissions Permits are Bankable," Journal of Regulatory Economics, Springer, vol. 28(2), pages 181-204, 09.
    6. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
    7. Murphy, James J. & Stranlund, John K., 2007. "A laboratory investigation of compliance behavior under tradable emissions rights: Implications for targeted enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 196-212, March.
    8. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
    9. Fullerton, Don & McDermott, Shaun P. & Caulkins, Jonathan P., 1997. "Sulfur Dioxide Compliance of a Regulated Utility," Journal of Environmental Economics and Management, Elsevier, vol. 34(1), pages 32-53, September.
    10. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
    11. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    12. Malueg, David A., 1990. "Welfare consequences of emission credit trading programs," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 66-77, January.
    13. Nicholas Stern, 2008. "The Economics of Climate Change," American Economic Review, American Economic Association, vol. 98(2), pages 1-37, May.
    14. Cason, Timothy N. & Plott, Charles R., 1996. "EPA's New Emissions Trading Mechanism: A Laboratory Evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 133-160, March.
    15. Bohm, Peter, 2003. "Experimental evaluations of policy instruments," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 10, pages 437-460 Elsevier.
    16. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
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