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An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets

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  • Perkis, David F.
  • Cason, Timothy N.
  • Tyner, Wallace E.

Abstract

Tradable emissions permits have been implemented to control pollution levels in various markets around the world and represent a major component of legislative efforts to control greenhouse gas (GHG) emissions in the United States. Because permits are supplied for a fixed level of pollution, allowing the market for permits to determine the price, there is a desire for price control mechanisms which would protect firms otherwise susceptible to price spikes caused by fluctuations in the demand for pollution abatement. We test permit markets in an experimental laboratory setting to determine the effectiveness of several price control mechanisms. Evidence suggests that both permit supply adjustments and traditional price ceilings (hard ceilings) effectively limit elevated prices in this setting. In contrast, reserve auctions (associated with soft ceiling designs) do not consistently control prices, especially when a minimum reserve permit price is applied. Furthermore, the grandfathering of permits allows permit sellers to realize significant welfare gains at the expense of buyers under a soft ceiling policy. Of the two ceiling options, our results point towards a hard ceiling as the preferred mechanism for controlling short term price increases.

Suggested Citation

  • Perkis, David F. & Cason, Timothy N. & Tyner, Wallace E., 2012. "An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124096, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea12:124096
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    References listed on IDEAS

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    1. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2014. "Price controls and banking in emissions trading: An experimental evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 71-86.

    More about this item

    Keywords

    Tradable Emissions Permit Market; Price Controls; Hard Ceiling; Soft Ceiling; Experimental Economics; Environmental Economics and Policy; Institutional and Behavioral Economics; Resource /Energy Economics and Policy;

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