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Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence

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  • Neil J. Buckley

Abstract

Two approaches to emissions trading are cap-and-trade, in which an aggregate cap on emissions is distributed in the form of allowance permits, and baseline-and-credit, in which firms earn emission reduction credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. This is in opposition to the prediction that when output capacity is fixed, the short-run equilibria of the two plans will be identical. As a first step towards testing the long-run model, this paper reports on a laboratory experiment designed to test the shortrun prediction. A computerized environment has been created in which subjects representing firms choose emission technologies under fixed output capacity and participate in markets for emission rights and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. Our evidence supports the theoretical prediction that the two trading mechanisms yield similar outcomes, however both exhibit significant deviation from the predicted equilibrium.

Suggested Citation

  • Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," Department of Economics Working Papers 2004-05, McMaster University.
  • Handle: RePEc:mcm:deptwp:2004-05
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    Cited by:

    1. Neil J. Buckley & Stuart Mestelman & R. Andrew Muller, 2006. "Implications Of Alternative Emission Trading Plans: Experimental Evidence," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 149-166, June.
    2. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2004. "Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence Under Variable Output Capacity," McMaster Experimental Economics Laboratory Publications 2004-06, McMaster University.
    3. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2005. "Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency," Department of Economics Working Papers 2005-04, McMaster University.
    4. Ying Sun & Fengqin Liu & Huaping Sun, 2022. "Does Standardization Improve Carbon Emission Efficiency as Soft Infrastructure? Evidence from China," Energies, MDPI, vol. 15(6), pages 1-17, March.
    5. Neil J. Buckley & Stuart Mestelman & R. Andrew Muller, 2014. "Production Capacity and Abatement Technology Strategies in Emissions Trading Markets," Department of Economics Working Papers 2014-16, McMaster University.
    6. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2005. "Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity," Department of Economics Working Papers 2005-03, McMaster University.

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    More about this item

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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