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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

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.

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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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Paper provided by Center for Economic and Policy Studies in its series Reports with number 2013-01.

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Date of creation: 18 Feb 2013
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Handle: RePEc:vac:report:rpt13-01
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  1. Burtraw, Dallas & Goeree, Jacob & Holt, Charles A. & Myers, Erica & Palmer, Karen & Shobe, William, 2008. "Collusion in Auctions for Emission Permits: An Experimental Analysis," Discussion Papers dp-08-36, Resources For the Future.
  2. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 91(4), pages 579-597.
  3. 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.
  4. 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.
  5. Georg Gr�ll & Luca Taschini, 2010. "Cap-and-trade properties under different hybrid scheme designs," GRI Working Papers 26, Grantham Research Institute on Climate Change and the Environment.
  6. repec:dau:papers:123456789/2267 is not listed on IDEAS
  7. repec:dau:papers:123456789/10174 is not listed on IDEAS
  8. Ellerman,A. Denny & Convery,Frank J. & de Perthuis,Christian, 2010. "Pricing Carbon," Cambridge Books, Cambridge University Press, number 9780521196475, June.
  9. Jarrow, Robert A., 1992. "Market Manipulation, Bubbles, Corners, and Short Squeezes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 311-336, September.
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