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Buyer Liability and Voluntary Inspections in International Greenhouse Gas Emissions Trading: A Laboratory Study

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  • Timothy Cason

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Abstract

This paper reports a preliminary laboratoryexperiment in which traders make investments toincrease the reliability of tradableinstruments that represent greenhouse gasemissions allowances. In one half of thesessions these investments are unobservable,while in the other half traders can invitecostless and accurate inspections that makereliability investments public. We implement abuyer liability rule, so that if emissionsreductions are unreliable (i.e., sellersdefault), the buyer of the allowances cannotredeem them to cover emissions. We find thatallowing inspections significantly increasesthe reliability investment rate and overallefficiency. Prices of uninspected allowancesusually trade at a substantial discount due tothe buyer liability rule, which provides astrong market incentive for sellers to investin reliability. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • Timothy Cason, 2003. "Buyer Liability and Voluntary Inspections in International Greenhouse Gas Emissions Trading: A Laboratory Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(1), pages 101-127, May.
  • Handle: RePEc:kap:enreec:v:25:y:2003:i:1:p:101-127
    DOI: 10.1023/A:1023665517698
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    References listed on IDEAS

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    1. Ledyard, John O. & Szakaly-Moore, Kristin, 1994. "Designing organizations for trading pollution rights," Journal of Economic Behavior & Organization, Elsevier, vol. 25(2), pages 167-196, October.
    2. R. Andrew Muller & Stuart Mestelman, 1994. "Emission Trading with Shares and Coupons: A Laboratory Experiment," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 185-211.
    3. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    4. Morten Søberg, 2000. "Price Expectations and International Quota Trading: An Experimental Evaluation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(3), pages 259-277, November.
    5. Andrew Muller, R. & Mestelman, Stuart & Spraggon, John & Godby, Rob, 2002. "Can Double Auctions Control Monopoly and Monopsony Power in Emissions Trading Markets?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 70-92, July.
    6. Plott, Charles R. & Gray, Peter., 1989. "Multiple Unit Double Auction," Working Papers 625, California Institute of Technology, Division of the Humanities and Social Sciences.
    7. Cason, Timothy N. & Gangadharan, Lata, 2002. "Environmental Labeling and Incomplete Consumer Information in Laboratory Markets," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 113-134, January.
    8. Cason, Timothy N. & Plott, Charles R., 1996. "EPA's New Emissions Trading Mechanism: A Laboratory Evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 133-160, March.
    9. Bohm, Peter & Carlen, Bjorn, 1999. "Emission quota trade among the few: laboratory evidence of joint implementation among committed countries," Resource and Energy Economics, Elsevier, vol. 21(1), pages 43-66, January.
    10. Franciosi Robert & Isaac R. Mark & Pingry David E. & Reynolds Stanley S., 1993. "An Experimental Investigation of the Hahn-Noll Revenue Neutral Auction for Emissions Licenses," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 1-24, January.
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    Cited by:

    1. Cason, Timothy N., 2010. "What Can Laboratory Experiments Teach Us About Emissions Permit Market Design?," Agricultural and Resource Economics Review, Cambridge University Press, vol. 39(02), pages 151-161, April.
    2. Heidari, Negin & Pearce, Joshua M., 2016. "A review of greenhouse gas emission liabilities as the value of renewable energy for mitigating lawsuits for climate change related damages," Renewable and Sustainable Energy Reviews, Elsevier, vol. 55(C), pages 899-908.
    3. Katerina Sherstyuk & Nori Tarui & Majah-Leah V. Ravago & Tatsuyoshi Saijo, 2016. "Intergenerational Games with Dynamic Externalities and Climate Change Experiments," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(2), pages 247-281.
    4. Hasson, Reviva & Löfgren, Åsa & Visser, Martine, 2010. "Climate change in a public goods game: Investment decision in mitigation versus adaptation," Ecological Economics, Elsevier, vol. 70(2), pages 331-338, December.

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