Environmental and Resource Economics

, Volume 63, Issue 4, pp 703–718 | Cite as

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

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

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)

References

  1. Burtraw D, Goeree J, Holt C, Myers E, Palmer K, Shobe W (2011) Price discovery in emissions permit auctions. In: Isaac RM, Norton DA (eds) Experiments on energy, the environment, and sustainability (Research in Experimental Economics). Emerald Group Publishing Limited, pp 11–36Google Scholar
  2. Burtraw D, Goeree J, Holt C, Palmer K, Shobe W (2007) Auction design for selling CO2 emission allowances under the regional greenhouse gas initiative. Resources for the Future, WashingtonGoogle Scholar
  3. Burtraw D, Palmer K, Kahn D (2010) A symmetric safety valve. Energy Policy 38:4921–4932CrossRefGoogle Scholar
  4. Cantwell M (2009) The Carbon Limts and Energy for America’s Renewal (CLEAR) Act: a simple, transparent, and equitable approach to energy independence and climate change mitigation. The Office of Senator Maria Cantwell, WashingtonGoogle Scholar
  5. Cason TN (2010) What can laboratory experiments teach us about emissions permit market design? Agric Resour Econ Rev 39:151–161Google Scholar
  6. Cason TN, Gangadharan L (2006) Emissions variability in tradable permit markets with imperfect enforcement and banking. J Econ Behav Organ 61:199–216CrossRefGoogle Scholar
  7. Cason TN, Noussair C (2007) A market with frictions in the matching process: an experimental study. Int Econ Rev 48:665–691CrossRefGoogle Scholar
  8. Coursey DL, Smith VL (1983) Price controls in a posted offer market. Am Econ Rev 73:218–221Google Scholar
  9. Fankhauser S, Hepburn C (2010) Designing carbon markets. Part I: carbon markets in time. Energy Policy 38:4363–4370CrossRefGoogle Scholar
  10. Fell H, Burtraw D, Morgenstern RD, Palmer KL (2012) Soft and hard price collars in a cap-and-trade system: a comparative analysis. J Environ Econ Manag 64:183–198CrossRefGoogle Scholar
  11. Fell H, Morgenstern RD (2010) Alternative approaches to cost containment in a cap-and-trade system. Environ Resour Econ 47:275–297CrossRefGoogle Scholar
  12. Fischbacher U (2007) z-Tree: Zurich toolbox for ready-made economic experiments. Exp Econ 10:171–178CrossRefGoogle Scholar
  13. Goeree JK, Palmer K, Holt CA, Shobe W, Burtraw D (2010) An experimental study of auctions versus grandfathering to assign pollution permits. J Eur Econ Assoc 8:514–525CrossRefGoogle Scholar
  14. Isaac RM, Plott CR (1981) Price controls and the behavior of auction markets—an experimental examination. Am Econ Rev 71:448–459Google Scholar
  15. Metcalf GE (2009) Cost containment in climate change policy: alternative approaches to mitigating price volatility. In: NBER Working paper series, working paper 15125. National Bureau of Economic Research, Cambridge, MAGoogle Scholar
  16. Murray BC, Newell RG, Pizer WA (2009) Balancing cost and emissions certainty: an allowance reserve for cap-and-trade. Rev Environ Econ Policy 3:84–103CrossRefGoogle Scholar
  17. Noussair C, Plott C, Riezman R (1995) An experimental investigation of the patterns of international trade. Am Econ Rev 85:462–491Google Scholar
  18. Pavley F, Nunez F (2006) Global warming solutions act. In: General assembly of CaliforniaGoogle Scholar
  19. Smith VL, Williams AW (1981) On nonbinding price controls in a competitive market. Am Econ Rev 71:467–474Google Scholar
  20. Smith VL, Williams AW (2008) Chapter 5 effect of non-binding price controls in double auction trading. In: Plott CR, Smith VL (eds) Handbook of experimental economics results. Elsevier, pp 46–53Google Scholar
  21. Stranlund JK, Murphy JJ, Spraggon JM (2011) An experimental analysis of compliance in dynamic emissions markets. J Environ Econ Manag 62:414–429CrossRefGoogle Scholar
  22. Stranlund JK, Murphy JJ, Spraggon JM (2014) Price controls and banking in emissions trading: an experimental evaluation. J Environ Econ Manag 68:71–86CrossRefGoogle Scholar
  23. Waxman HA, Markey EJ (2009) House passes historic Waxman–Markey clean energy bill. Congressman Edward Markey Press ReleaseGoogle Scholar
  24. Williams E (2010) An analysis of the carbon limits and energy for America’s renewal (CLEAR) act and comparison to Waxman–Markey. In: Nicholas institute for environmental policy solutions . Duke University, Durham, NCGoogle Scholar

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

Personalised recommendations