Environmental and Resource Economics

, Volume 46, Issue 3, pp 331–336

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

  • Markus Wråke
  • Erica Myers
  • Dallas Burtraw
  • Svante Mandell
  • Charles Holt
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

Authors and Affiliations

  • Markus Wråke
    • 1
  • Erica Myers
    • 2
  • Dallas Burtraw
    • 2
  • Svante Mandell
    • 3
  • Charles Holt
    • 4
  1. 1.IVL Swedish Environmental Research InstituteStockholmSweden
  2. 2.Resources for the FutureWashingtonUSA
  3. 3.Swedish National Road and Transport Research InstituteStockholmSweden
  4. 4.Department of EconomicsUniversity of VirginiaCharlottesvilleUSA