Environmental and Resource Economics

, Volume 46, Issue 3, pp 331–336

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

Authors

    • IVL Swedish Environmental Research Institute
  • Erica Myers
    • Resources for the Future
  • Dallas Burtraw
    • Resources for the Future
  • Svante Mandell
    • Swedish National Road and Transport Research Institute
  • Charles Holt
    • Department of EconomicsUniversity of Virginia
Article

DOI: 10.1007/s10640-010-9343-z

Cite this article as:
Wråke, M., Myers, E., Burtraw, D. et al. Environ Resource Econ (2010) 46: 331. doi:10.1007/s10640-010-9343-z

Abstract

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.

Keywords

AuctionEmissions allowancesGrandfathering

JEL Classification

C91D44

Copyright information

© Springer Science+Business Media B.V. 2010