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Investment Incentives Under Emission Trading: An Experimental Study

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  • Eva Camacho-Cuena
  • Till Requate
  • Israel Waichman

Abstract

This paper presents the results of an experimental investigation on incentives to adopt advanced abatement technology under emissions trading. Our experimental design mimics an industry with small asymmetric polluting firms regulated by different schemes of tradable permits. We consider three allocation/auction policies: auctioning off (costly) permits through an ascending clock auction, grandfathering permits with re-allocation through a single-unit double auction, and grandfathering with re-allocation through an ascending clock auction. Our results confirm both dynamic and static theoretical equivalence of auctioning and grandfathering. We nevertheless find that although the market institution used to reallocate permits does not impact the dynamic efficiency from investment, it affects the static efficiency from permit trading. Copyright Springer Science+Business Media B.V. 2012

Suggested Citation

  • Eva Camacho-Cuena & Till Requate & Israel Waichman, 2012. "Investment Incentives Under Emission Trading: An Experimental Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(2), pages 229-249, October.
    • Handle: RePEc:kap:enreec:v:53:y:2012:i:2:p:229-249
    DOI: 10.1007/s10640-012-9560-8
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    Cited by:

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    2. Soo Keong Yong & Lana Friesen & Stuart McDonald, 2018. "Emission Taxes, Clean Technology Cooperation, And Product Market Collusion: Experimental Evidence," Economic Inquiry, Western Economic Association International, vol. 56(4), pages 1950-1979, October.
    3. Silvester van Koten, 2014. "Do Emission Trading Schemes Facilitate Efficient Abatement Investments? An Experimental Study," CERGE-EI Working Papers wp503, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    4. da Gama Batista, João & Massaro, Domenico & Bouchaud, Jean-Philippe & Challet, Damien & Hommes, Cars, 2017. "Do investors trade too much? A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 18-34.
    5. Trevor L. Davis & Mark C. Thurber & Frank A. Wolak, 2020. "An Experimental Comparison of Carbon Pricing Under Uncertainty in Electricity Markets," NBER Working Papers 27260, National Bureau of Economic Research, Inc.
    6. Michailova, Julija, 2010. "Overconfidence, risk aversion and (economic) behavior of individual traders in experimental asset markets," MPRA Paper 26390, University Library of Munich, Germany.
    7. Chenhao Fang & Tieju Ma, 2021. "Technology adoption with carbon emission trading mechanism: modeling with heterogeneous agents and uncertain carbon price," Annals of Operations Research, Springer, vol. 300(2), pages 577-600, May.
    8. Timothy N. Cason & Frans P. Vries, 2019. "Dynamic Efficiency in Experimental Emissions Trading Markets with Investment Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(1), pages 1-31, May.
    9. Lidia Vidal-Meliá & Carmen Arguedas & Eva Camacho-Cuena & José Luis Zofío, 2022. "An Experimental Analysis of the Effects of Imperfect Compliance on Technology Adoption," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 81(3), pages 425-451, March.
    10. 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.
    11. Jones, Luke R. & Vossler, Christian A., 2014. "Experimental tests of water quality trading markets," Journal of Environmental Economics and Management, Elsevier, vol. 68(3), pages 449-462.
    12. Ancev, Tiho & Baltaduonis, Rimvydas & Immer-Bernold, Elizabeth, 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(03), January.
    13. Suter, Jordan F. & Spraggon, John M. & Poe, Gregory L., 2011. "Thin and lumpy: an experimental investigation of water quality trading," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 104023, Agricultural and Applied Economics Association.
    14. Veronika Grimm & Lyuba Ilieva, 2013. "An experiment on emissions trading: the effect of different allocation mechanisms," Journal of Regulatory Economics, Springer, vol. 44(3), pages 308-338, December.

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    More about this item

    Keywords

    Environmental policy; Abatement technology; Taxes; Permit trading; Auctions; C92; D44; L51; Q28; Q55;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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