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Production Capacity and Abatement Technology Strategies in Emissions Trading Markets

Listed author(s):
  • Neil J. Buckley
  • Stuart Mestelman
  • R. Andrew Muller

Two common approaches to emissions trading are “cap-and-trade”, in which an absolute 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 (which are often defined relative to output using emissions intensity targets). This paper reports on an experiment designed to test the theoretical predictions of the two approaches in a long-run laboratory environment in which subjects representing firms choose emission abatement technologies and output capacities. Subjects participate in vertical markets for emission rights and for output. Our evidence supports the theoretical prediction that aggregate output and emissions are inefficiently high in baseline-and-credit markets compared to corresponding cap-and-trade markets. A surprising finding is that it is clean firms that lead the inefficient output and emissions expansion in baseline-and-credit markets.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2014-16.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2014-16.

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Length: 81 pages
Date of creation: 2014
Handle: RePEc:mcm:deptwp:2014-16
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  1. Marschinski, Robert & Edenhofer, Ottmar, 2010. "Revisiting the case for intensity targets: Better incentives and less uncertainty for developing countries," Energy Policy, Elsevier, vol. 38(9), pages 5048-5058, September.
  2. Cason, Timothy N, 1995. "An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction," American Economic Review, American Economic Association, vol. 85(4), pages 905-922, September.
  3. Stephen Smith & Joseph Swierzbinski, 2007. "Assessing the performance of the UK Emissions Trading Scheme," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(1), pages 131-158, May.
  4. NeilJ. 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, 06.
  5. Ben-David, Shaul & Brookshire, David S. & Burness, Stuart & McKee, Michael & Schmidt, Christian, 1999. "Heterogeneity, Irreversible Production Choices, and Efficiency in Emission Permit Markets," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 176-194, September.
  6. Donald N. Dewees, 2001. "Emissions Trading: ERCs or Allowances?," Land Economics, University of Wisconsin Press, vol. 77(4), pages 513-526.
  7. Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," McMaster Experimental Economics Laboratory Publications 2004-03, McMaster University.
  8. Carolyn Fischer, 2003. "Combining rate-based and cap-and-trade emissions policies," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages 89-103, December.
  9. Quirion, Philippe, 2005. "Does uncertainty justify intensity emission caps?," Resource and Energy Economics, Elsevier, vol. 27(4), pages 343-353, November.
  10. Andrew Muller, R. & Mestelman, Stuart & Spraggon, John & Godby, Rob, 2002. "Can Double Auctions Control Monopoly and Monopsony Power in Emissions Trading Markets?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 70-92, July.
  11. Passey, Robert & MacGill, Iain & Outhred, Hugh, 2008. "The governance challenge for implementing effective market-based climate policies: A case study of The New South Wales Greenhouse Gas Reduction Scheme," Energy Policy, Elsevier, vol. 36(8), pages 2999-3008, August.
  12. Loewenstein, George, 1999. "Experimental Economics from the Vantage-Point of Behavioural Economics," Economic Journal, Royal Economic Society, vol. 109(453), pages 23-34, February.
  13. 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.
  14. R. Andrew Muller, 1999. "Emissions trading without a quantity constraint," Department of Economics Working Papers 1999-13, McMaster University.
  15. Jan-Tjeerd Boom & Bouwe Dijkstra, 2009. "Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.
  16. Godby, Robert W. & Mestelman, Stuart & Muller, R. Andrew & Welland, J. Douglas, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain," Journal of Environmental Economics and Management, Elsevier, vol. 32(3), pages 359-381, March.
  17. Murphy, James J. & Stranlund, John K., 2006. "Direct and market effects of enforcing emissions trading programs: An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 217-233, October.
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