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Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative

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  • Friesen, Lana
  • Gangadharan, Lata
  • Khezr, Peyman
  • MacKenzie, Ian A.

Abstract

We investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The scheme incorporates two allowance reserves that adjust the supply of allowances in the event of unexpectedly high or low allowance demand. These reserves are enacted if the clearing price breaches a predetermined set of trigger prices. Our experiment finds trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We find the existence of focal points can be explained by both the institutional design and subjects’ behavior. Further, decreasing the range between trigger prices increases total revenue but decreases allocative efficiency. The regulation is more sensitive to changes in trigger prices than reserve quantities.

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  • 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).
    • Handle: RePEc:eee:jeeman:v:112:y:2022:i:c:s0095069622000109
    DOI: 10.1016/j.jeem.2022.102620
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    Cited by:

    1. Salant, Stephen & Shobe, William & Uler, Neslihan, 2023. "The effects of seemingly nonbinding price floors: An experimental analysis," European Economic Review, Elsevier, vol. 159(C).
    2. 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.
    3. Heijmans, Roweno J.R.K., 2023. "Adjustable emissions caps and the price of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    4. Timothy N. Cason & John K. Stranlund & Frans P. de Vries, 2022. "Investment Incentives in Tradable Emissions Markets with Price Floors Approach," Purdue University Economics Working Papers 1331, Purdue University, Department of Economics.

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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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