Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity
AbstractTwo approaches to emissions trading are cap-and-trade, in which an aggregate cap on emissions is distributed in the form of allowance permits, and baseline-and-credit, in which firms earn emission reduction credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. As a progressive step towards testing the full long-run model, this paper reports on a laboratory experiment designed to test the prediction under fixed emission rates and variable output capacity. A computerized environment has been created in which sub jects representing firms choose output capacities under fixed emission technology and participate in markets for emission rights and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. Our evidence supports the theoretical prediction that aggregate output and emissions are inefficiently high under a baseline-and-credit trading plan compared to a corresponding cap-and-trade plan.
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Bibliographic InfoPaper provided by McMaster University in its series Department of Economics Working Papers with number 2005-03.
Length: 30 pages
Date of creation: May 2005
Date of revision:
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Find related papers by JEL classification:
- C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-11 (All new papers)
- NEP-ENE-2005-09-11 (Energy Economics)
- NEP-ENV-2005-09-11 (Environmental Economics)
- NEP-EXP-2005-09-11 (Experimental Economics)
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