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Elements of emission market design: an experimental analysis of California's market for greenhouse gas allowances

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Abstract

We use a set of economic experiments to test the effects of some novel features of California's new controls on greenhouse gas emissions. The California cap and trade scheme imposes limits on allowance ownership, uses a tiered price containment reserve sale, and settles allowance auctions based on the lowest accepted bid. We examine the effects of these features on market liquidity, efficiency, and price variability. We find that tight holding limits substantially reduce banking, which, in turn reduces market liquidity. This impairs the ability of traders to smooth prices over time, resulting in lower efficiency and higher price variability. The price containment reserve, while increasing the supply of allowances available to traders, does not appear to mitigate the effects of tight holding limits on market outcomes. As a result, the imposition of holding limits in the allowance market may have the consequence of increasing the likelihood of the market manipulation that they were intended to prevent. Finally, we find that the choice between lowest accepted bid and highest rejected bid for the allowance auction pricing rule does not have a significant effect on market outcomes.

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  • William M. Shobe & Charles A. Holt & Thaddeus Huetteman, 2014. "Elements of emission market design: an experimental analysis of California's market for greenhouse gas allowances," Working Papers 2014-01, Center for Economic and Policy Studies.
    • Handle: RePEc:vac:wpaper:wp14-01
    Note: This is a revised version of a paper formerly entitled: Banking and price containment in California's greenhouse gas emissions market: an experimental analysis of market design Journal of Economic Behavior and Organization Vol. 107, pp. 402-420.
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    2. Liu, Yang & Han, Liyan & Yin, Ziqiao & Luo, Kongyi, 2017. "A competitive carbon emissions scheme with hybrid fiscal incentives: The evidence from a taxi industry," Energy Policy, Elsevier, vol. 102(C), pages 414-422.
    3. Friesen, Lana & Gangadharan, Lata & Khezr, Peyman & MacKenzie, Ian A., 2022. "Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative," Journal of Environmental Economics and Management, Elsevier, vol. 112(C).
    4. Khezr, Peyman & MacKenzie, Ian A., 2021. "Revenue and efficiency in pollution permit allocation mechanisms," Energy Economics, Elsevier, vol. 93(C).
    5. Khezr, Peyman & Pourkhanali, Armin, 2023. "An investigation of auctions in the Regional Greenhouse Gas Initiative," MPRA Paper 119289, University Library of Munich, Germany.
    6. 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.
    7. Khezr, Peyman & MacKenzie, Ian A., 2018. "Permit market auctions with allowance reserves," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 283-306.
    8. Singfat Chu, 2014. "Mitigating supply and price volatilities in Singapore’s vehicle quota system," Transportation, Springer, vol. 41(5), pages 1119-1134, September.
    9. Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2019. "Cost containment in pollution auctions," Discussion Papers Series 610, School of Economics, University of Queensland, Australia.
    10. Holt, Charles A. & Shobe, William M., 2016. "Reprint of: Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 69-86.
    11. Tiho Ancev & Rimvydas Baltaduonis & Elizabeth Immer‐Bernold, 2021. "Regulating greenhouse gas emissions by an inter‐temporal policy mix: an experimental investigation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(3), pages 512-538, July.
    12. Youming Liu & Shanjun Li & Caixia Shen, 2020. "The Dynamic Efficiency in Resource Allocation: Evidence from Vehicle License Lotteries in Beijing," NBER Working Papers 26904, National Bureau of Economic Research, Inc.
    13. John F. Raffensperger, 2020. "A price on warming with a supply chain directed market," Papers 2003.05114, arXiv.org, revised Mar 2021.
    14. Khezr, Peyman & Pourkhanali, Armin, 2023. "An investigation of auctions in the Regional Greenhouse Gas Initiative," MPRA Paper 118120, University Library of Munich, Germany.

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    More about this item

    Keywords

    cap and trade; uniform price auction; market liquidity; price containment reserve; emission markets; carbon markets;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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