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

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  • Veronika Grimm

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  • 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

Suggested Citation

  • 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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    References listed on IDEAS

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    1. repec:gam:jsusta:v:10:y:2018:i:6:p:1972-:d:152054 is not listed on IDEAS
    2. Chang, Kai & Chang, Hao, 2016. "Cutting CO2 intensity targets of interprovincial emissions trading in China," Applied Energy, Elsevier, vol. 163(C), pages 211-221.
    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. Bizer, Kilian & Henger, Ralph & Meub, Lukas & Proeger, Till, 2014. "The political economy of certificates for land use in Germany: Experimental evidence," Center for European, Governance and Economic Development Research Discussion Papers 225, University of Goettingen, Department of Economics.
    5. Alvarez, Francisco & André, Francisco J., 2015. "Auctioning emission permits in a leader-follower setting," MPRA Paper 61698, University Library of Munich, Germany.
    6. 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).
    7. 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.
    8. Meub, Lukas & Proeger, Till & Bizer, Kilian & Henger, Ralph, 2015. "Die Effizienz von Zuteilungsmechanismen bei Flächenzertifikaten zwischen Versteigerung und Grandfathering: Experimentelle Evidenz," Center for European, Governance and Economic Development Research Discussion Papers 235, University of Goettingen, Department of Economics.
    9. 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.

    More about this item

    Keywords

    Emissions trading; Auction; Grandfathering; Experiment; C92; D43; D44; Q58;

    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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