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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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:
Contact details of provider:
Postal: 1280 Main Street West, Hamilton, Ontario, L8S 4M4
Phone: (905) 525-9140 ext. 22765
Fax: (905) 521-8232
Web page: http://www.economics.mcmaster.ca/
More information through EDIRC
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cason, Timothy N, 1995. "An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction," American Economic Review, American Economic Association, American Economic Association, vol. 85(4), pages 905-22, September.
- Donald N. Dewees, 2001.
"Emissions Trading: ERCs or Allowances?,"
University of Wisconsin Press, vol. 77(4), pages 513-526.
- Donald N. Dewees, 2000. "Emissions Trading: ERCs or Allowances," Working Papers, University of Toronto, Department of Economics dewees-00-01, University of Toronto, Department of Economics.
- R. Andrew Muller, 1999. "Emissions trading without a quantity constraint," Department of Economics Working Papers 1999-13, McMaster University.
- Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers, Resources For the Future dp-03-32, Resources For the Future.
- Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers, Resources For the Future dp-01-22, Resources For the Future.
- 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.
- Neil Buckley & R. Andrew Muller & Stuart Mestelman, 2003.
"Long-Run Implications of Alternative Emission Trading Plans: An Experiment with Robot Traders,"
Department of Economics Working Papers
2003-04, McMaster University.
- Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2003. "Long-Run Implications of Alternative Emission Trading Plans: An Experiment with Robot Traders," McMaster Experimental Economics Laboratory Publications, McMaster University 2003-03, McMaster University.
- Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," McMaster Experimental Economics Laboratory Publications, McMaster University 2004-03, McMaster University.
- Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," Department of Economics Working Papers 2004-05, McMaster University.
- Jan-Tjeerd Boom & Bouwe Dijkstra, 2009. "Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.
- Guidon Fenig & Mariya Mileva & Luba Petersen, 2013. "Asset Trading and Monetary Policy in Production Economies," Discussion Papers dp13-08, Department of Economics, Simon Fraser University, revised Aug 2014.
- Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2005. "Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency," Department of Economics Working Papers 2005-04, McMaster University.
- Li, Hong & Huang, Chengming & Yang, Bill Z., 2011. "Environmental Regulation, Business Innovation and International Competitiveness - Regolazione ambientale, innovazioni d’impresa e competitività internazionale," Economia Internazionale / International Economics, Camera di Commercio di Genova, Camera di Commercio di Genova, vol. 64(1), pages 115-128.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.