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Investigation of the Effects of Emission Market Design on the Market-Based Compliance Mechanism of the California Cap on Greenhouse Gas Emissions

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Abstract

The state of California has implemented an economy-wide program to regulate its greenhouse gas emissions. A significant share of the emission reductions will be obtained via a cap and trade program with a mix of auctioning and free allocation of allowances. This program has a number of novel design features including, among other things, a price containment reserve, a limit on ownership of allowances, and the forced consignment to auction of some of the share of freely allocated allowances. We use a series of laboratory experiments to test the influence of two of these design features on the performance of the emissions market. We test the effect of holding limits and of the new three-tier price containment sale mechanism. We find that tight holding limits used to prevent market dominance reduce liquidity and appear to harm market efficiency and price discovery. The price containment sale mechanism reduces price spikes during periods of high allowance demand and has different effects on market performance than releasing the price containment reserve as part of the auction of allowances. We discuss the implications for the design of price containment reserves.

Suggested Citation

  • Charles A. Holt & William M. Shobe, 2013. "Investigation of the Effects of Emission Market Design on the Market-Based Compliance Mechanism of the California Cap on Greenhouse Gas Emissions," Reports 2013-01, Center for Economic and Policy Studies.
    • Handle: RePEc:vac:report:rpt13-01
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    File URL: http://econ.ccps.virginia.edu/RePEc_docs/ceps_docs/FINAL_REPORT_CA_Cap_and_Trade_Market_Simulation_Results.pdf
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    References listed on IDEAS

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    1. Veconlab gets (really) environmental
      by John Whitehead in Environmental Economics on 2013-04-01 14:48:12

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