Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies

Luca Taschini; Marc Chesney; Mei Wang

doi:10.1007/s11149-013-9238-3

Journal of Regulatory Economics

August 2014, Volume 46, Issue 1, pp 23–50

Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies

Authors
Authors and affiliations

Luca TaschiniEmail author
Marc Chesney
Mei Wang

Original Article

First Online:: 14 January 2014

DOI: 10.1007/s11149-013-9238-3

Cite this article as:: Taschini, L., Chesney, M. & Wang, M. J Regul Econ (2014) 46: 23. doi:10.1007/s11149-013-9238-3

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Abstract

This paper examines the investment strategies of compliance companies in irreversible abatement technologies and the environmental achievements of the system in an inter-temporal cap-and-trade market using laboratory experiments. The experimental analysis is performed under varying market structures: firstly, in a market that is exclusive to compliance companies and subsequently, in a market that is open to both compliance and non-compliance entities. In line with theoretical models on irreversible abatement investment, the paper shows that regulated companies trade permits at a premium. Also, steep per unit penalties for excess emissions prompt early investments in irreversible abatement technologies. Further, the paper shows that by contributing to the permit demand and supply, non-compliance companies (i) enhance the exchange of permits, helping the system to achieve a zero-excess permit position, (ii) increase the price levels, but has no apparent effect on price variability.

Keywords

Irreversible abatementStochastic emissionsDynamic tradingParticipation restrictionsNon-compliance entities

JEL Classification

Q50C02C91D40

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Authors and Affiliations

Luca Taschini
- 1
Email author
Marc Chesney
- 2
Mei Wang
- 3

1.The Grantham Research Institute on Climate Change and the EnvironmentLondon School of Economics and Political ScienceLondon UK
2.Department of Banking and FinanceUniversity of Zurich and Swiss Finance InstituteZurichSwitzerland
3.WHU - Otto Beisheim School of ManagementVallendarGermany

Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies

Abstract

Keywords

JEL Classification

Copyright information

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