Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: 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 first 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 subjects 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 significantly greater under a baseline-and-credit trading plan than under a comparable 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 McMaster Experimental Economics Laboratory Publications with number 2004-06.
Length: 30 pages
Date of creation: Jun 2004
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.mcmaster.ca/economics/
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-EXP-2004-11-07 (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.:
- 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.
- Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
- 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.
- 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 2003-03, McMaster University.
- 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.
- 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 dp-03-32, Resources For the Future.
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.