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Investment Decisions and Emissions Reductions:Results from Experiments in Emissions Trading

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Author Info
L. Gangadharan
A. Farrell
R. Croson

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Abstract

Emissions trading is an important regulatory tool in environmental policy making. Unfortunately the effectiveness of these regulations is difficult to measure in the field due to the unavailability of appropriate data. In contrast, experiments in the laboratory can provide guidance to regulators and legislatures about the performance of different market features in emission trading programs. This paper reports on the implementation of three different institutional designs, and presents experimental results investigating important features of emissions trading regimes: the ability to make investments in emissions abatement, ability to bank allowances and a declining emissions cap, both with and without uncertainty. These features are observed in virtually all existing air pollution emissions trading programs currently in place and will almost certainly be part of future applications. Like previous experimental studies of emissions trading, this paper shows that the efficiency gains expected from economic theory emerge observationally. We also show reduced efficiency when permits are bankable due to over-banking and when investments in emissions abatement are possible due to overinvesting. These tendencies do not worsen, however, when emissions caps decline.

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File URL: http://www.economics.unimelb.edu.au/SITE/research/workingpapers/wp05/942.pdf
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Publisher Info
Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 942.

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Length: 42 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mlb:wpaper:942

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Related research
Keywords: Emissions Trading; Investment in Abatement; Banking; Laboratory Experiments;

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Find related papers by JEL classification:
Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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  1. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November. [Downloadable!] (restricted)
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    Other versions:
  3. Shaul Ben-David & David Brookshire & Stuart Burness & Michael McKee & Christian Schmidt, 2000. "Attitudes toward Risk and Compliance in Emission Permit Markets," Land Economics, University of Wisconsin Press, vol. 76(4), pages 590-600. [Downloadable!] (restricted)
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    Other versions:
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  7. 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!]
    Other versions:
  8. Bohm, Peter & Carlen, Bjorn, 1999. "Emission quota trade among the few: laboratory evidence of joint implementation among committed countries," Resource and Energy Economics, Elsevier, vol. 21(1), pages 43-66, January. [Downloadable!] (restricted)
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  12. Hindsberger, Magnus & Nybroe, Malene Hein & Ravn, Hans F. & Schmidt, Rune, 2003. "Co-existence of electricity, TEP, and TGC markets in the Baltic Sea Region," Energy Policy, Elsevier, vol. 31(1), pages 85-96, January. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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    Other versions:
  22. repec:cup:cbooks:9780521023894 is not listed on IDEAS
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    Other versions:
  25. Bohi, Douglas R. & Burtraw, Dallas, 1992. "Utility investment behavior and the emission trading market," Resources and Energy, Elsevier, vol. 14(1-2), pages 129-153, April. [Downloadable!] (restricted)
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