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Market Power in Tradable Emission Markets: A Laboratory Testbed for Emission Trading in Port Phillip Bay, Victoria

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  • Cason, Timothy N.
  • Gangadharan, Lata
  • Duke, Charlotte

Abstract

In theory, competitive emission permit markets minimise total abatement cost for any emission ceiling. Permit markets are often imperfectly competitive, however, if they are thin and dominated by large firms. The dominant firm(s) could exercise market power and increase other firms’ costs of pollution control, while reducing their own emission control costs. This paper reports a testbed laboratory experiment to examine whether a dominant firm can exercise market power in a permit market organised using the double auction trading institution. Our parameters approximate the abatement costs of sources in a proposed tradable emissions market for the reduction of nitrogen in the Port Phillip Watershed in Victoria, Australia. We vary across treatments the initial (pre-trade) allocation of permits to sources, so that in one treatment the seller of permits is a monopolist and in another treatment the selling side of the market is duopolistic. We also vary the information that subjects have about the number and abatement costs of their competitors. We find that prices and seller profits are higher and efficiency is lower on average in the monopoly sessions compared to the duopoly sessions, but the differences are not substantial and are not statistically significant due to pronounced variation across sessions. Moreover, prices, profits and transaction volumes are usually much closer to the competitive equilibrium than the monopoly equilibrium.

Suggested Citation

  • Cason, Timothy N. & Gangadharan, Lata & Duke, Charlotte, 2003. "Market Power in Tradable Emission Markets: A Laboratory Testbed for Emission Trading in Port Phillip Bay, Victoria," 2003 Conference (47th), February 12-14, 2003, Fremantle, Australia 57841, Australian Agricultural and Resource Economics Society.
  • Handle: RePEc:ags:aare03:57841
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Hintermann, Beat & Peterson, Sonja & Rickels, Wilfried, 2014. "Price and market behavior in Phase II of the EU ETS," Kiel Working Papers 1962, Kiel Institute for the World Economy (IfW).
    3. Ghosh, Gaurav & Kwasnica, Anthony & Shortle, James, 2010. "A Laboratory Experiment to Compare Two Market Institutions for Emissions Trading," FCN Working Papers 18/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    4. Huang, Ming-Yuan & Alavalapati, Janaki R.R. & Carter, Douglas R. & Langholtz, Matthew H., 2007. "Is the choice of renewable portfolio standards random?," Energy Policy, Elsevier, vol. 35(11), pages 5571-5575, November.
    5. Koji Kotani & Kenta Tanaka & Shunsuke Managi, 2015. "Which performs better under a trader setting, double auction or uniform price auction?," Working Papers SDES-2015-17, Kochi University of Technology, School of Economics and Management, revised May 2015.
    6. Bodo Sturm, 2008. "Market Power in Emissions Trading Markets Ruled by a Multiple Unit Double Auction: Further Experimental Evidence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(4), pages 467-487, August.
    7. Tisdell, John G. & Grainger, Corinne, 2008. "An Experimental Economic Analysis of Carbon Trading Options for Australia," 2008 Conference, August 28-29, 2008, Nelson, New Zealand 96661, New Zealand Agricultural and Resource Economics Society.
    8. 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.
    9. repec:eee:foreco:v:29:y:2017:i:pa:p:25-37 is not listed on IDEAS
    10. Timilsina, Raja Rajendra & Kotani, Koji, 2017. "Evaluating the potential of marketable permits in a framed field experiment: Forest conservation in Nepal," Journal of Forest Economics, Elsevier, vol. 29(PA), pages 25-37.
    11. Duke, Charlotte & Gangadharan, Lata, 2008. "Salinity in water markets: An experimental investigation of the Sunraysia Salinity Levy in Australia," Ecological Economics, Elsevier, vol. 68(1-2), pages 486-503, December.
    12. Douglas Davis & Oleg Korenok & Edward Simpson Prescott, 2014. "An Experimental Analysis of Contingent Capital with Market‐Price Triggers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 999-1033, August.
    13. Antelo, Manel & Bru, Lluís, 2009. "Permit markets, market power, and the trade-off between efficiency and revenue raising," Resource and Energy Economics, Elsevier, vol. 31(4), pages 320-333, November.
    14. Liu, Beibei & He, Pan & Zhang, Bing & Bi, Jun, 2012. "Impacts of alternative allowance allocation methods under a cap-and-trade program in power sector," Energy Policy, Elsevier, vol. 47(C), pages 405-415.
    15. Bodo Sturm & Joachim Weimann, 2006. "Experiments in Environmental Economics and Some Close Relatives," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 419-457, July.
    16. Tisdell, John, 2007. "Bringing biophysical models into the economic laboratory: An experimental analysis of sediment trading in Australia," Ecological Economics, Elsevier, vol. 60(3), pages 584-595, January.
    17. Kristiana Hansen & Jonathan Kaplan & Stephan Kroll, 2014. "Valuing Options in Water Markets: A Laboratory Investigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(1), pages 59-80, January.
    18. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    19. Timothy N. Cason & Lata Gangadharan, 2013. "Cooperation Spillovers And Price Competition In Experimental Markets," Economic Inquiry, Western Economic Association International, vol. 51(3), pages 1715-1730, July.
    20. C. Duke & L. Gangadharan, 2005. "Salinity in Water Markets : An ExperimentalInvestigation of the Sunraysia Salinity Levy, Victoria," Department of Economics - Working Papers Series 950, The University of Melbourne.
    21. Vivi Alatas & Lisa Cameron & Ananish Chaudhuri & Nisvan Erkal & Lata Gangadharan, 2009. "Subject pool effects in a corruption experiment: A comparison of Indonesian public servants and Indonesian students," Experimental Economics, Springer;Economic Science Association, vol. 12(1), pages 113-132, March.
    22. Jaehn, Florian & Letmathe, Peter, 2010. "The emissions trading paradox," European Journal of Operational Research, Elsevier, vol. 202(1), pages 248-254, April.
    23. Timilsina, Raja Rajendra & Kotani, Koji, 2017. "Evaluating the potential of marketable permits in a framed field experiment: Forest conservation in Nepal," Journal of Forest Economics, Elsevier, vol. 29(PA), pages 25-37.
    24. Koji Kotani & Kenta Tanaka & Shunsuke Managi, 2014. "On the fundamental performance of a marketable permit system in a trader setting," Working Papers SDES-2014-2, Kochi University of Technology, School of Economics and Management, revised Oct 2014.
    25. Arthur Caplan, 2008. "Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(3), pages 419-435, November.

    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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