IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits

  • Restiani, Phillia
  • Betz, Regina

This paper investigates the behavioural implications of penalty designs on market performance using an experimental method. Three penalty types and two penalty levels are enforced in a laboratory permit market with auctioning, including the Australian Carbon Pollution Reduction Scheme proposed design of tying the penalty rate to the auction price. Compliance strategies are limited to undertaking irreversible abatement investment decisions or buying permits. We aim to assess how penalty design under the presence of subjects‟ risk preferences might affect compliance incentives, permit price discovery, and efficiency. In contrast to theory, we find that penalty levels serve as a focal point that indicates compliance costs and affects compliance strategies. The make-good provision penalty provides stronger compliance incentives than the other penalty types. However, the theory holds with regard to permit price discovery, as we find no evidence of the effect of penalty design on auction price. Interestingly, risk preference does not directly affect compliance decision, but it does influence price discovery, which evidently is a significant factor in compliance decisions as well as efficiency. Most importantly, a trade-off between investment incentives and efficiency is observed.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Australian National University, Environmental Economics Research Hub in its series Research Reports with number 107586.

in new window

Date of creation: Dec 2010
Date of revision:
Handle: RePEc:ags:eerhrr:107586
Contact details of provider: Postal: Crawford Building, Lennox Crossing, Building #132, Canberra ACT 2601
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  2. Ledyard, John O. & Szakaly, Kristin E., . "Designing Organizations for Trading Pollution Rights," Working Papers 838, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Klemperer, Paul, 2000. "What Really Matters in Auction Design," CEPR Discussion Papers 2581, C.E.P.R. Discussion Papers.
  4. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2010. "A symmetric safety valve," Energy Policy, Elsevier, vol. 38(9), pages 4921-4932, September.
  5. Olivier Compte & Philippe Jehiel, 2007. "Auctions and information acquisition: sealed bid or dynamic formats?," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 355-372, 06.
  6. Timothy N. Cason & Lata Gangadharan, 2004. "Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking," Department of Economics - Working Papers Series 917, The University of Melbourne.
  7. Szolgayova, Jana & Fuss, Sabine & Obersteiner, Michael, 2008. "Assessing the effects of CO2 price caps on electricity investments--A real options analysis," Energy Policy, Elsevier, vol. 36(10), pages 3974-3981, October.
  8. Fell, Harrison & Morgenstern, Richard, 2009. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Discussion Papers dp-09-14, Resources For the Future.
  9. Charles A. Holt & William Shobe & Dallas Burtraw & Karen Palmer & Jacob K. Goeree, 2007. "Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative," Reports 2007-03, Center for Economic and Policy Studies.
  10. Jacob K. Goeree & Theo Offerman, 1999. "Competitive Bidding in Auctions with Private and Common Values," Virginia Economics Online Papers 337, University of Virginia, Department of Economics.
  11. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
  12. Jacoby, Henry D. & Ellerman, A. Denny, 2004. "The safety valve and climate policy," Energy Policy, Elsevier, vol. 32(4), pages 481-491, March.
  13. Nentjes, Andries & Klaassen, Ger, 2004. "On the quality of compliance mechanisms in the Kyoto Protocol," Energy Policy, Elsevier, vol. 32(4), pages 531-544, March.
  14. Restiani, Phillia & Betz, Regina, 2010. "A Theoretical Model of Optimal Compliance Decisions under Different Penalty Designs in Emissions Trading Markets," Research Reports 107585, Australian National University, Environmental Economics Research Hub.
  15. Kling, Catherine L. & Rubin, Jonathan, 1997. "Bankable Permits for the Control of Environmental Pollution," Staff General Research Papers 1479, Iowa State University, Department of Economics.
  16. Porter, David & Rassenti, Stephen & Shobe, William & Smith, Vernon & Winn, Abel, 2009. "The design, testing and implementation of Virginia's NOx allowance auction," Journal of Economic Behavior & Organization, Elsevier, vol. 69(2), pages 190-200, February.
  17. James J. Murphy & John K. Stranlund, 2005. "A Laboratory Investigation of Compliance Behavior under Tradable Emissions Rights: Implications for Targeted Enforcement," Working Papers 2005-1, University of Massachusetts Amherst, Department of Resource Economics.
  18. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
  19. Smith, Vernon L & Williams, Arlington W, 1981. "On Nonbinding Price Controls in a Competitive Market," American Economic Review, American Economic Association, vol. 71(3), pages 467-74, June.
  20. Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ags:eerhrr:107586. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.