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Mind your Ps and Qs! An Experiment on Variable Allowance Supply in the US Regional Greenhouse Gas Initiative

Author

Listed:
  • Lana Friesen

    (School of Economics, University of Queensland)

  • Lata Gangadharan

    (Department of Economics, Monash University, Australia)

  • Peyman Khezr

    (School of Economics, University of Queensland)

  • Ian A. MacKenzie

    (School of Economics, University of Queensland)

Abstract

Using an experimental approach, we investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The proposed scheme incorporates two allowance reserves that adjust the initial supply of allowances in the event of unexpectedly high or low allowance demand. In particular, allowance supply is increased when the initial clearing price is above a pre-determined upper trigger price, and decreased when the initial clearing price is below a pre-determined lower trigger price. We provide evidence that these two trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We also show that decreasing the range between the two trigger prices increases total revenue but decreases allocative efficiency. Importantly, we find the regulation is more sensitive to changes in trigger prices than reserve quantities.

Suggested Citation

  • Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2020. "Mind your Ps and Qs! An Experiment on Variable Allowance Supply in the US Regional Greenhouse Gas Initiative," Discussion Papers Series 618, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:618
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    File URL: https://economics.uq.edu.au/files/39626/618.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Jeong, Dawoon & Sesmero, Juan Pablo, 2021. "Do changing weather patterns warrant more flexibility in cap-and-trade policy for irrigation water conservation? A case study in Mexico," 2021 Annual Meeting, August 1-3, Austin, Texas 314081, Agricultural and Applied Economics Association.
    3. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design Matters!," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224576, Verein für Socialpolitik / German Economic Association.
    4. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design matters!," EWI Working Papers 2020-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    5. Timothy N. Cason & Lana Friesen & Lata Gangadharan, 2021. "Complying with environmental regulations: experimental evidence," Chapters, in: Ananish Chaudhuri (ed.), A Research Agenda for Experimental Economics, chapter 4, pages 69-92, Edward Elgar Publishing.
    6. Khezr, Peyman & MacKenzie, Ian A., 2021. "Revenue and efficiency in pollution permit allocation mechanisms," Energy Economics, Elsevier, vol. 93(C).
    7. Hintermayer, Martin, 2020. "A carbon price floor in the reformed EU ETS: Design matters!," Energy Policy, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    supply reserve; pollution allowances; experiment.;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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