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An experiment on emissions trading: the effect of different allocation mechanisms

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  • Veronika Grimm
  • Lyuba Ilieva

Abstract

In theory, efficiency and compliance levels induced by an emission trading system should not depend on the initial allocation mechanism for permits in the absence of transaction costs. In a laboratory experiment we investigate this prediction by comparing frequent and infrequent auctioning as well as two different grandfathering schemes under market rules that closely resemble those of the European Union Emission Trading System. Our experimental results suggest that, contrary to theoretical predictions, the initial allocation procedure has the potential to affect efficiency of the final permit allocation. While we do not identify an effect of the initial allocation procedure itself (auction vs. grandfathering), we observe higher final efficiency after infrequent auctioning of permits than for frequent auctioning. Surprisingly, for a grandfathering scheme that distributes permits proportional to expected needs the high initial efficiency is substantially reduced by secondary market trading. An analysis of behavioral patterns shows that permit prices and abatement levels are initially substantially higher if permits are allocated by auction and we also find more over-banking as compared to the grandfathering treatments. Treatment differences diminish in the course of the experiment. Copyright Springer Science+Business Media New York 2013

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  • 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.
    • Handle: RePEc:kap:regeco:v:44:y:2013:i:3:p:308-338
    DOI: 10.1007/s11149-013-9222-y
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    Cited by:

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    2. Bizer, Kilian & Henger, Ralph & Meub, Lukas & Proeger, Till, 2014. "The political economy of certificates for land use in Germany: Experimental evidence," University of Göttingen Working Papers in Economics 225, University of Goettingen, Department of Economics.
    3. Leibbrandt, Andreas & Lynham, John, 2018. "Does the allocation of property rights matter in the commons?," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 201-217.
    4. Frédéric Branger, Philippe Quirion, Julien Chevallier, 2017. "Carbon Leakage and Competitiveness of Cement and Steel Industries Under the EU ETS: Much Ado About Nothing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    5. Wang, M. & Zhou, P., 2022. "A two-step auction-refund allocation rule of CO2 emission permits," Energy Economics, Elsevier, vol. 113(C).
    6. 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.
    7. Proeger, Till & Meub, Lukas & Bizer, Kilian, 2017. "The role of communication on an experimental market for tradable development rights," Land Use Policy, Elsevier, vol. 68(C), pages 614-624.
    8. 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.
    9. 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.
    10. Zhang, Hongyu & Zhang, Da & Zhang, Xiliang, 2023. "The role of output-based emission trading system in the decarbonization of China's power sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 173(C).
    11. Chang, Kai & Chang, Hao, 2016. "Cutting CO2 intensity targets of interprovincial emissions trading in China," Applied Energy, Elsevier, vol. 163(C), pages 211-221.
    12. Proeger Till & Meub Lukas & Bizer Kilian & Henger Ralph, 2017. "Die Effizienz von Zuteilungsmechanismen bei Flächenzertifikaten zwischen Versteigerung und Grandfathering – experimentelle Evidenz," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 66(1), pages 80-109, April.
    13. Alvarez, Francisco & André, Francisco J., 2015. "Auctioning emission permits in a leader-follower setting," MPRA Paper 61698, University Library of Munich, Germany.
    14. Ye Duan & Zenglin Han & Hailin Mu & Jun Yang & Yonghua Li, 2019. "Research on the Impact of Various Emission Reduction Policies on China’s Iron and Steel Industry Production and Economic Level under the Carbon Trading Mechanism," Energies, MDPI, vol. 12(9), pages 1-26, April.
    15. Alvarez Francisco & André Francisco J., 2016. "Auctioning Emission Permits with Market Power," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(4), pages 1-28, October.

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    More about this item

    Keywords

    Emissions trading; Auction; Grandfathering; Experiment; C92; D43; D44; Q58;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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