Environmental and Resource Economics

, Volume 46, Issue 3, pp 331-336

First online:

Opportunity Cost for Free Allocations of Emissions Permits: An Experimental Analysis

  • Markus WråkeAffiliated withIVL Swedish Environmental Research Institute Email author 
  • , Erica MyersAffiliated withResources for the Future
  • , Dallas BurtrawAffiliated withResources for the Future
  • , Svante MandellAffiliated withSwedish National Road and Transport Research Institute
  • , Charles HoltAffiliated withDepartment of Economics, University of Virginia

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An important feature of emissions trading is how emissions permits are allocated. The choice between an auction and free allocation should not influence firms’ production choices nor consumer prices according to economic theory. However, many parties expect the method of allocation to affect product prices. This paper describes an experimental investigation into price determination under a cap-and-trade program with different allocation methods. Participants initially display diverse pricing strategies. However, given a simple economic setting in which earnings depend on behavior, we find that subjects learn to consider the opportunity cost of permits and overall behavior moves toward the economic prediction.


Auction Emissions allowances Grandfathering

JEL Classification

C91 D44