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Production Capacity and Abatement Technology Strategies in Emissions Trading Markets

Author

Listed:
  • Neil J. Buckley
  • Stuart Mestelman
  • R. Andrew Muller

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:mcm:deptwp:2014-16
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2014-16.pdf
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    References listed on IDEAS

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    5. Donald N. Dewees, 2001. "Emissions Trading: ERCs or Allowances?," Land Economics, University of Wisconsin Press, vol. 77(4), pages 513-526.
    6. 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.
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    12. 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

    Keywords

    emissions trading; tradable permits; baseline-and-credit; cap-and-trade; relative targets; intensity targets; performance standards;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • 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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