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.
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 2005-04.
Length: 38 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:
- 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)
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.:
- Donald N. Dewees, 2001.
"Emissions Trading: ERCs or Allowances?,"
University of Wisconsin Press, vol. 77(4), pages 513-526.
- 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.
- Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
- Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers dp-03-32, Resources For the Future.
- NeilJ. Buckley & Stuart Mestelman & R.Andrew Muller, 2006.
"Implications Of Alternative Emission Trading Plans: Experimental Evidence,"
Pacific Economic Review,
Wiley Blackwell, vol. 11(2), pages 149-166, 06.
- Neil J. Buckley & S. Mestelman & Andrew Muller, 2004. "Implications of Alternative Emission Trading Plans: Experimental Evidence," Department of Economics Working Papers 2004-07, 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 2004-03, McMaster University.
- Cason, Timothy N, 1995. "An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction," American Economic Review, American Economic Association, vol. 85(4), pages 905-22, September.
- Godby, Robert W. & Mestelman, Stuart & Muller, R. Andrew & Welland, J. Douglas, 1997.
"Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain,"
Journal of Environmental Economics and Management,
Elsevier, vol. 32(3), pages 359-381, March.
- Stuart Mestelman & Andrew Muller, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain," McMaster Experimental Economics Laboratory Publications 1997-01, McMaster University.
- Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2005. "Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity," Department of Economics Working Papers 2005-03, McMaster University.
- Ben-David, Shaul & Brookshire, David S. & Burness, Stuart & McKee, Michael & Schmidt, Christian, 1999. "Heterogeneity, Irreversible Production Choices, and Efficiency in Emission Permit Markets," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 176-194, September.
- R. Andrew Muller, 1999. "Emissions trading without a quantity constraint," Department of Economics Working Papers 1999-13, McMaster University.
- 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.
- Andrew Muller, R. & Mestelman, Stuart & Spraggon, John & Godby, Rob, 2002. "Can Double Auctions Control Monopoly and Monopsony Power in Emissions Trading Markets?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 70-92, July.
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.