Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking
Unexpected variation in emissions can have a substantial impact on the prices and efficiency of tradable emission permit markets. In this paper we report results from a laboratory experiment in which subjects participate in an emissions trading market in the presence of emissions uncertainty. Subjects face exogenous, random positive or negative shocks to their emission levels after they make production and emission control plans. In some sessions we allow subjects to bank their unused permits for future use. In all sessions, subjects can trade in a reconciliation period to buy or sell extra permits following the shock realization. Subjects then report their emissions to the regulatory authority and they are placed in different inspection groups depending on their compliance history. The design of our experiment allows us to identify important interactions between emission shocks, banking, compliance and enforcement. We find that the relationship between emission shocks and price changes is significantly stronger without banking, so banking helps smooth out the price variability arising from the imperfect control of emissions. This greater price stability comes at a cost, however, since noncompliance and emissions are significantly greater when banking is allowed.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 3 8344 5355
Fax: +61 3 8344 6899
Web page: http://www.economics.unimelb.edu.au
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.:
- 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.
- Raymond, Mark, 1999. "Enforcement leverage when penalties are restricted: a reconsideration under asymmetric information," Journal of Public Economics, Elsevier, vol. 73(2), pages 289-295, August.
- Eckert, Heather, 2004. "Inspections, warnings, and compliance: the case of petroleum storage regulation," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 232-259, March.
- Stuart Mestelman & Andrew Muller, 1997.
"Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain,"
McMaster Experimental Economics Laboratory Publications
1997-01, McMaster University.
- 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.
- Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
- Shaul Ben-David & David Brookshire & Stuart Burness & Michael McKee & Christian Schmidt, 2000. "Attitudes toward Risk and Compliance in Emission Permit Markets," Land Economics, University of Wisconsin Press, vol. 76(4), pages 590-600.
- Timothy N. Cason & Lata Gangadharan, 2006.
"An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement,"
Western Economic Association International, vol. 44(2), pages 352-366, April.
- Timothy N. Cason & Lata Gangadharan, 2004. "An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement," Department of Economics - Working Papers Series 918, The University of Melbourne.
- Landsberger, Michael & Meilijson, Isaac, 1982. "Incentive generating state dependent penalty system : The case of income tax evasion," Journal of Public Economics, Elsevier, vol. 19(3), pages 333-352, December.
- Kling, Catherine & Rubin, Jonathan, 1997.
"Bankable permits for the control of environmental pollution,"
Journal of Public Economics,
Elsevier, vol. 64(1), pages 101-115, April.
- 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.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- Stuart Mestelman & Rob Moir & Andrew Muller, 1998. "A Laboratory Test of Canadian Proposals for an Emission Trading Program," McMaster Experimental Economics Laboratory Publications 1998-03, McMaster University.
- Janusz Mrozek & Andrew Keeler, 2004. "Pooling of Uncertainty: Enforcing Tradable Permits Regulation when Emissions are Stochastic," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(4), pages 459-481, December.
- Greenberg, Joseph, 1984. "Avoiding tax avoidance: A (repeated) game-theoretic approach," Journal of Economic Theory, Elsevier, vol. 32(1), pages 1-13, February.
- 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.
- Innes, Robert, 2003. "Stochastic pollution, costly sanctions, and optimality of emission permit banking," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 546-568, May.
- 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.
When requesting a correction, please mention this item's handle: RePEc:mlb:wpaper:917. 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: (Aminata Doumbia)
If references are entirely missing, you can add them using this form.