An experiment on emissions trading: the effect of different allocation mechanisms
- 643 Downloads
In theory, efficiency and compliance levels induced by an emission trading system should not depend on the initial allocation mechanism for permits in the absence of transaction costs. In a laboratory experiment we investigate this prediction by comparing frequent and infrequent auctioning as well as two different grandfathering schemes under market rules that closely resemble those of the European Union Emission Trading System. Our experimental results suggest that, contrary to theoretical predictions, the initial allocation procedure has the potential to affect efficiency of the final permit allocation. While we do not identify an effect of the initial allocation procedure itself (auction vs. grandfathering), we observe higher final efficiency after infrequent auctioning of permits than for frequent auctioning. Surprisingly, for a grandfathering scheme that distributes permits proportional to expected needs the high initial efficiency is substantially reduced by secondary market trading. An analysis of behavioral patterns shows that permit prices and abatement levels are initially substantially higher if permits are allocated by auction and we also find more over-banking as compared to the grandfathering treatments. Treatment differences diminish in the course of the experiment.
KeywordsEmissions trading Auction Grandfathering Experiment
JEL ClassificationC92 D43 D44 Q58
The authors are grateful for financial support from Stiftung Energieforschung Baden- Württemberg, research Grant A 268 07, and the State Government of Bavaria, grant for the project “Economy” within “Energie Campus Nürnberg (EnCN)”. We thank Deutsche Forschungsgemeinschaft (DFG), which provided the funds for the Cologne Laboratory for Experimental Research (CLER). We thank Andreas Pollak, Christian Wittneben, and Christopher Zeppenfeld for their support with the development of the software for the experiment. We also thank Axel Ockenfels, Georg Gebhardt, Mattia Nardotto, seminar participants at the University of Cologne, participants of the ESA-Conference in Innsbruck 2009, the WCERE-2010 Congress in Montreal, and at the GfeW 2011 conference in Nuremberg for helpful discussions and comments. Last, but not least, we are indebted to two anonymous referees as well as the editor for their valuable comments and suggestions. All errors are our own.
- Benz, E., & Ehrhart, K.-M. (2007). Which allocation rule generates true price signals for the CO2 allowance market?. In ‘Saving Energy — Just Do It!’, ECEEE 2007 Summer Study (pp. 125–134).Google Scholar
- Cason, T. N. (2010). What can laboratory experiments teach us about emissions permit market design? Agricultural and Resource Economics Review, 39(2), 151–161.Google Scholar
- CO2-Handel.de (2012a). ‘Dritte EUA-Auktion für Litauen’. Retrieved April 19, 2012 from http://www.co2-handel.de/article58_17968.html.
- CO2-Handel.de (2012b). ‘EEX führt fünfte Primärmarktauktion für die Niederlande’. Retrieved April 19, 2012 from http://www.co2-handel.de/article58_18138.html.
- Cramton, P., & Kerr, S. (2002). Tradable carbon permit auctions: How and why to auction and not grandfather. Economic Policy, 30, 333–345.Google Scholar
- Gagelmann, F. (2008). Participants’ treatment of allowance price uncertainty: How are risk-aversion and real option values related to each other. In B. Hansjnrgens & R. Antes (Eds.), Economics and management of climate change: Risks, mitigation and adaptation (pp. 125–144). Dordrecht: Springer.Google Scholar
- Gangadharan, L., Farrell, A. & Croson, R. (2005). Investment decisions and emissions reductions: Results from experiments in emissions trading. Research Paper.Google Scholar
- Goeree, J. K., Holt, C. A., Palmer, K., Shobe, W., & Burtraw, D. (2010). An experimental study of auctioning versus grandfathering to assign pollution permits. Journal of European Economic Association, 8(2–3), 514–525.Google Scholar
- Greiner, B. (2004). An online recruitment system for economic experiments. In K. Kremer & V. Macho (Eds.), Forschung und wissenschaftliches Rechnen 2003, Vol. 63 of GWDG Bericht (pp. 79–93). Göttingen: Ges. für Wiss. Datenverarbeitung.Google Scholar
- Hepburn, C., Grubb, M., Neuhoff, K., Matthes, F., & Tse, M. (2006). Auctioning of EU ETS Phase II allowances: How and why? Climate Policy, 6, 137–160.Google Scholar
- Holt, C., Shobe, W., Burtraw, D., Palmer, K., & Goeree, J. (2007). Auction design for selling CO2 emission allowances under the Reginal Greenhouse Gas Initiative. Final Report.Google Scholar
- Neuhoff, K., Matthes, F. C., Betz, R., Dröge, S., Johnston, A., Kudelko, M., et al. (2008). The role of auctions for emission trading. Climate Strategies.Google Scholar
- Ostertag, K., Schleich, J., Ehrhart, K.-M., Goebes, L., Müller, J., Seifert, S., et al. (2010). Neue Instrumente für weniger Flächenverbrauch: Der Handel mit Flächenausweisungszertifikaten im Experiment. Berlin: Frauenhofer Verlag.Google Scholar
- RRGI (Regional Greenhouse Gas Initiative) (2012). ‘Auction results’. Retrieved April 19, 2012 from http://www.rggi.org/market/co2_auctions/results.
- Siegel, S., & Castellan, N. J. (1988). Nonparametric statistics for the behavioral sciences. New York: McGraw-Hill.Google Scholar
- Sturm, B. (2008). Double auction experiments and their relevance for emissions trading. In R. Antes, B. Hansjnrgens, & P. Letmathe (Eds.), Emissions trading: Institutional design, decision making, and corporate strategies (pp. 49–68). New York: Springer.Google Scholar
- Wråke, M., Myers, E., Mandell, S., Holt, C. & Burtraw, D. (2008). Pricing strategies under emissions trading: An experimental analysis. Discussion Paper.Google Scholar