The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits

Phillia Restiani and Regina Betz
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Phillia Restiani: The School of Economics and Centre for Energy and Environmental Markets at UNSW

Environmental Economics Research Hub Research Reports from Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University

Abstract: This paper investigates the behavioural implications of penalty designs on market performance using an experimental method. Three penalty types and two penalty levels are enforced in a laboratory permit market with auctioning, including the Australian Carbon Pollution Reduction Scheme proposed design of tying the penalty rate to the auction price. Compliance strategies are limited to undertaking irreversible abatement investment decisions or buying permits. We aim to assess how penalty design under the presence of subjects‟ risk preferences might affect compliance incentives, permit price discovery, and efficiency. In contrast to theory, we find that penalty levels serve as a focal point that indicates compliance costs and affects compliance strategies. The make-good provision penalty provides stronger compliance incentives than the other penalty types. However, the theory holds with regard to permit price discovery, as we find no evidence of the effect of penalty design on auction price. Interestingly, risk preference does not directly affect compliance decision, but it does influence price discovery, which evidently is a significant factor in compliance decisions as well as efficiency. Most importantly, a trade-off between investment incentives and efficiency is observed.

Date: 2010-12
New Economics Papers: this item is included in nep-ene, nep-env and nep-exp
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Citations: View citations in EconPapers (4)

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Working Paper: The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:een:eenhrr:1087

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