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Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain

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Author Info
Stuart Mestelman
Andrew Muller

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Abstract

Two important decisions in designing markets for tradable emissions permits are whether to allow banking of permits (coupons) and whether to allow trading in entitlements to future permits (shares). Banking is predicted to reduce price instability when firms trade in a reconciliation market after the quantity of emissions has been determined. Tradable shares are a common feature in proposals for emissions trading in Canada. We conduct a laboratory experiment to investigate how bankable coupons and tradable shares affect efficiency and prices under uncertainty. Cognitive demands on the subjects are reduced by computerized advice on the optimal allocation of coupons across periods and the implied marginal values of coupons and shares. Banking, share trading and uncertainty conditions are introduced in a complete factorial design with three observations per cell. High efficiencies are observed across all treatments. Uncertainty in the control of emissions leads to substantial price instability when banking is not allowed. Banking virtually eliminates the instability, but reduces the efficiency of the market institution. Share trading reduces trading volumes, increases price stability and improves efficiency.

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Paper provided by McMaster University in its series McMaster Experimental Economics Laboratory Publications with number 1997-01.

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Length: 23 pages
Date of creation: Jan 1997
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Handle: RePEc:mcm:mceelp:1997-01

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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.:
  1. 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. [Downloadable!] (restricted)
  2. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June. [Downloadable!] (restricted)
  3. Ledyard, John O. & Szakaly-Moore, Kristin, 1994. "Designing organizations for trading pollution rights," Journal of Economic Behavior & Organization, Elsevier, vol. 25(2), pages 167-196, October. [Downloadable!] (restricted)
  4. Stuart Mestelman & Andrew Muller, 1994. "Emission Trading with Shares and Coupons : A Laboratory Experiment," McMaster Experimental Economics Laboratory Publications 1994-01, McMaster University. [Downloadable!]
  5. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Stuart Mestelman & Andrew Muller, 1997. "What Have We Learned From Emissions Trading Experiments?," McMaster Experimental Economics Laboratory Publications 1997-03, McMaster University. [Downloadable!]
    Other versions:
  2. repec:mop:credwp:06.02.63 is not listed on IDEAS
  3. Olivier Rousse & Benoît Sévi, 2005. "Behavioral Heterogeneity in the US Sulfur Dioxide Emissions Allowance Trading Program," ERSA conference papers ersa05p550, European Regional Science Association. [Downloadable!]
  4. 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. [Downloadable!]
  5. L. Gangadharan & A. Farrell & R. Croson, 2005. "Investment Decisions and Emissions Reductions:Results from Experiments in Emissions Trading," Department of Economics - Working Papers Series 942, The University of Melbourne. [Downloadable!]
  6. Bosetti, Valentina & Carraro, Carlo & Massetti, Emanuele, 2008. "Banking Permits: Economic Efficiency and Distributional Effects," CEPR Discussion Papers 6652, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. 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. [Downloadable!]
  8. Daniel Phaneuf & Till Requate, 2002. "Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(3), pages 369-390, July. [Downloadable!] (restricted)
  9. Emilie Alberola & Julien Pierre Chevallier, 2007. "European carbon prices and banking restrictions: evidence from phase I (2005-2007)," EconomiX Working Papers 2007-32, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
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  10. Timothy N. Cason & Lata Gangadharan, 2004. "Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking," Department of Economics - Working Papers Series 917, The University of Melbourne. [Downloadable!]
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  11. Bodo Sturm, 2008. "Market Power in Emissions Trading Markets Ruled by a Multiple Unit Double Auction: Further Experimental Evidence," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(4), pages 467-487, August. [Downloadable!] (restricted)
  12. R. Andrew Muller & Stuart Mestelman & John Spraggon & Rob Godby, 1999. "Can auctions control market power in emissions trading markets," Department of Economics Working Papers 1999-12, McMaster University. [Downloadable!]
  13. Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2008. "Prices versus Quantities versus Bankable Quantities," Discussion Papers dp-08-32, Resources For the Future. [Downloadable!]
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