Environmental and Resource Economics

, Volume 25, Issue 1, pp 101–127

Buyer Liability and Voluntary Inspections in International Greenhouse Gas Emissions Trading: A Laboratory Study

  • Timothy N. Cason
Article

Abstract

This paper reports a preliminary laboratoryexperiment in which traders make investments toincrease the reliability of tradableinstruments that represent greenhouse gasemissions allowances. In one half of thesessions these investments are unobservable,while in the other half traders can invitecostless and accurate inspections that makereliability investments public. We implement abuyer liability rule, so that if emissionsreductions are unreliable (i.e., sellersdefault), the buyer of the allowances cannotredeem them to cover emissions. We find thatallowing inspections significantly increasesthe reliability investment rate and overallefficiency. Prices of uninspected allowancesusually trade at a substantial discount due tothe buyer liability rule, which provides astrong market incentive for sellers to investin reliability.

emissions permits environment experiments Kyoto Protocol 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Timothy N. Cason
    • 1
  1. 1.Department of Economics, Krannert School of ManagementPurdue UniversityWest LafayetteUSA

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