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Pricing Strategies under Emissions Trading: An Experimental Analysis

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Author Info
Wråke, Markus
Myers, Erica
Mandell, Svante
Holt, Charles
Burtraw, Dallas () (Resources for the Future)

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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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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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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

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    Other versions:
  3. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall. [Downloadable!] (restricted)
  4. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January. [Downloadable!] (restricted)
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  5. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June. [Downloadable!] (restricted)
    Other versions:
  6. 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, August.
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