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Cognitive Bias in Emissions Trading

Author

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  • Jae-Do Song

    () (College of Business Administration, Chonnam National University, Gwangju 61186, Korea)

  • Young-Hwan Ahn

    () (Korea Energy Economics Institute, 405-11 Jongga-ro, Jung-gu, Ulsan 44543, Korea)

Abstract

This study investigates whether cognitive biases such as the endowment effect and status quo bias occur in emissions trading. Such cognitive biases can serve as a barrier to trade. This study’s survey-based experiments, which include hypothetical emissions trading scenarios, show that the endowment effect does occur in emissions trading. The status quo bias occurs in only one of the three experiments. This study also investigates whether accumulation of experience can reduce cognitive bias as discovered preference hypothesis expects. The results indicate that practitioners who are supposed to have more experience show no evidence of having less cognitive bias. Contrary to the conventional expectation, the practitioners show significantly higher level of endowment effect than students and only the practitioners show a significant status quo bias. A consignment auction situation, which is used in California’s cap-and-trade program, is also tested; no significant difference between general permission trading and consignment auctions is found.

Suggested Citation

  • Jae-Do Song & Young-Hwan Ahn, 2019. "Cognitive Bias in Emissions Trading," Sustainability, MDPI, Open Access Journal, vol. 11(5), pages 1-13, March.
  • Handle: RePEc:gam:jsusta:v:11:y:2019:i:5:p:1365-:d:211104
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    References listed on IDEAS

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    More about this item

    Keywords

    emissions trading; cognitive bias; consignment auction; climate policy;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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