Environmental and Resource Economics

, Volume 63, Issue 4, pp 703–718

An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets

  • David F. Perkis
  • Timothy N. Cason
  • Wallace E. Tyner
Article

DOI: 10.1007/s10640-014-9810-z

Cite this article as:
Perkis, D.F., Cason, T.N. & Tyner, W.E. Environ Resource Econ (2016) 63: 703. doi:10.1007/s10640-014-9810-z

Abstract

Tradable emissions permits have been implemented to control pollution levels in various markets and represent a major component of legislative efforts to control greenhouse gas emissions. Because permits are supplied for a fixed level of pollution, allowing the market for permits to determine the price, price control mechanisms may be needed to protect firms from price spikes caused by fluctuations in the demand for permits. We test permit markets in an experimental laboratory setting to determine the effectiveness of several price control mechanisms, with special attention on the soft price ceiling. We focus on a static setting similar to some of the earliest experimental work focused on price ceilings. Results indicate that both permit supply adjustments and price ceilings (hard ceilings) effectively limit elevated prices in this setting. By contrast, reserve auctions to implement soft ceilings do not consistently control prices, especially when a minimum reserve permit price is applied. Furthermore, the grandfathering of permits allows permit sellers to realize significant welfare gains at the expense of buyers under a soft ceiling policy. Our results thus highlight several advantages of hard ceilings for controlling short term price increases.

Keywords

Greenhouse gases Hard and soft price ceilings  Laboratory economic experiments Pollution and price controls   Reserve auction Tradable emissions permit market 

Supplementary material

10640_2014_9810_MOESM1_ESM.docx (136 kb)
Supplementary material 1 (docx 136 KB)

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • David F. Perkis
    • 1
  • Timothy N. Cason
    • 2
  • Wallace E. Tyner
    • 3
  1. 1.Department of Agricultural EconomicsPurdue UniversityWest LafayetteUSA
  2. 2.Department of Economics, Krannert School of ManagementPurdue UniversityWest LafayetteUSA
  3. 3.Department of Agricultural EconomicsPurdue UniversityWest LafayetteUSA

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