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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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    1. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130 World Scientific Publishing Co. Pte. Ltd..
    2. Shobe, William & Palmer, Karen & Myers, Erica & Holt, Charles & Goeree, Jacob & Burtraw, Dallas, 2010. "An Experimental Analysis of Auctioning Emission Allowances Under a Loose Cap," Agricultural and Resource Economics Review, Cambridge University Press, vol. 39(02), pages 162-175, April.
    3. Grüll, Georg & Taschini, Luca, 2011. "Cap-and-trade properties under different hybrid scheme designs," Journal of Environmental Economics and Management, Elsevier, vol. 61(1), pages 107-118, January.
    4. repec:dau:papers:123456789/2267 is not listed on IDEAS
    5. Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
    6. repec:dau:papers:123456789/10174 is not listed on IDEAS
    7. Jacob K. Goeree & Charles A. Holt & Karen Palmer & William Shobe & Dallas Burtraw, 2010. "An Experimental Study of Auctions Versus Grandfathering to Assign Pollution Permits," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 514-525, 04-05.
    8. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 91(4), pages 579-597.
    9. Dallas Burtraw & Jacob Goeree & Charles A. Holt & Erica Myers & Karen Palmer & William Shobe, 2009. "Collusion in auctions for emission permits: An experimental analysis," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(4), pages 672-691.
    10. Ellerman,A. Denny & Convery,Frank J. & de Perthuis,Christian With contributions by-Name:Alberola,Emilie With contributions by-Name:Buchner,Barbara K. With contributions by-Name:Delbosc,Anaïs, 2010. "Pricing Carbon," Cambridge Books, Cambridge University Press, number 9780521196475, March.
    11. Charles A. Holt & William Shobe & Dallas Burtraw & Karen Palmer & Jacob K. Goeree, 2007. "Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative," Reports 2007-03, Center for Economic and Policy Studies.
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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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    Keywords

    Emission markets; experiments; cap and trade; greenhouse gas emissions; market design;

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