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Pricing Strategies under Emissions Trading: An Experimental Analysis

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  • Wråke, Markus
  • Myers, Erica
  • Mandell, Svante
  • Holt, Charles
  • Burtraw, Dallas

    ()
    (Resources for the Future)

Abstract

An important feature in the design of an emissions trading program is how emissions allowances are initially distributed into the market. In a competitive market the choice between an auction and free allocation should, according to economic theory, not have any influence on firms’ production choices nor on consumer prices. However, many observers expect the method of allocation to affect product prices. This paper reports on the use of experimental methods to investigate behavior with respect to how prices will be determined under a cap-and-trade program. Participants initially display a variety of pricing strategies. However, given a simple economic setting in which earnings depend on this behavior, we find that subjects learn to consider the value of allowances and overall behavior moves toward that predicted by economic theory.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-08-49.

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Date of creation: 23 Dec 2008
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Handle: RePEc:rff:dpaper:dp-08-49

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Related research

Keywords: carbon dioxide; climate change; emissions trading; distributional effects; electricity; allocation; auctions;

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References

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  1. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, December.
    • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, December.
  2. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September.
  3. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
  4. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
  5. Irwin, Julie R, et al, 1998. "Payoff Dominance vs. Cognitive Transparency in Decision Making," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 272-85, April.
  6. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes: General equilibrium analyses," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73560, Tilburg University.
  7. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
  8. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future.
  9. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
  10. Ken Binmore & Paul Klemperer, 2002. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licences," Economic Journal, Royal Economic Society, vol. 112(478), pages C74-C96, March.
  11. Plott, Charles R, 1983. "Externalities and Corrective Policies in Experimental Markets," Economic Journal, Royal Economic Society, vol. 93(369), pages 106-27, March.
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Cited by:
  1. Dormady, Noah C., 2013. "Market power in cap-and-trade auctions: A Monte Carlo approach," Energy Policy, Elsevier, vol. 62(C), pages 788-797.
  2. Mandell, Svante & Holt, Chrles & Myers, Erica & Burtraw, Dallas & Wråke, Markus, 2009. "Teaching Opportunity Cost in an Emissions Permit Experiment," Working Papers 2009:6, Swedish National Road & Transport Research Institute (VTI).
  3. Hasson, Reviva & Löfgren, Åsa & Visser, Martine, 2009. "Climate Change in a Public Goods Game: Investment Decision in Mitigation versus Adaptation," Discussion Papers dp-09-23-efd, Resources For the Future.
  4. Marc Chesney & Luca Taschini & Mei Wang, 2011. "Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without nonregulated companies," Grantham Research Institute on Climate Change and the Environment Working Papers 41, Grantham Research Institute on Climate Change and the Environment.

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