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Do Emission Trading Schemes Facilitate Efficient Abatement Investments? An Experimental Study

  • Silvester van Koten

Cap-and-trade programs, such as the EU carbon Emission Trading Scheme, are currently the most prominent market-based method used to reduce carbon emissions. Cap-and-trade programs are, on theoretical grounds, considered to be a cost-efficient method. Experimental evidence, however, shows that experimental subjects make highly inefficient abatement choices and that permit allocation methods (allocating permits for free or against payment) bias subjects to too much or too little abatement. The experimental evidence thus suggests that cap-and-trade programs may in practice be more costly than theory predicts. This study, however, challenges this interpretation and shows that, when they are price takers (as in thick markets) and have ample opportunities for learning, subjects quickly learn to make accurate decisions and that these decisions are not affected by the permit allocation method.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp503.

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Date of creation: Jan 2014
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Handle: RePEc:cer:papers:wp503
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