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

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References

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  1. Plott, Charles R, 1983. "Externalities and Corrective Policies in Experimental Markets," Economic Journal, Royal Economic Society, vol. 93(369), pages 106-27, March.
  2. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
  3. 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, April.
    • 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, April.
  4. Binmore, Kenneth & Klemperer, Paul, 2002. "The Biggest Auction Ever: The Sale of the British 3G Telecom Licences," CEPR Discussion Papers 3214, C.E.P.R. Discussion Papers.
  5. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  6. Ian W. H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," NBER Working Papers 5967, National Bureau of Economic Research, Inc.
  7. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
  8. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
  9. 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.
  10. Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III & Dallas Burtraw, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," NBER Working Papers 6464, National Bureau of Economic Research, Inc.
  11. 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.
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Cited by:
  1. Hasson, Reviva & Löfgren, Åsa & Visser, Martine, 2009. "Climate Change in a Public Goods Game: Investment Decision in Mitigation versus Adaptation," Working Papers in Economics 416, University of Gothenburg, Department of Economics.
  2. Holt, Charles & Myers, Erica & Wråke, Markus & Mandell, Svante & Burtraw, Dallas, 2009. "Teaching Opportunity Cost in an Emissions Permit Experiment," Discussion Papers dp-09-22, Resources For the Future.
  3. Dormady, Noah C., 2013. "Market power in cap-and-trade auctions: A Monte Carlo approach," Energy Policy, Elsevier, vol. 62(C), pages 788-797.
  4. Luca Taschini & Marc Chesney & Mei Wang, 2014. "Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies," Journal of Regulatory Economics, Springer, vol. 46(1), pages 23-50, August.
  5. 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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