Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency
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. This paper reports on a laboratory experiment designed to test the prediction in a laboratory environ- ment in which sub jects representing firms choose emission technologies and output capacities. A computerized environment has been created in which sub jects 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 in- efficiently 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 2005-04.
Length: 38 pages
Date of creation: May 2005
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Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
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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