Dynamic Efficiency of Emission Trading Markets: An Experimental Study

Andreas Nicklisch () and Leon Zucchini

Papers on Strategic Interaction from Max Planck Institute of Economics, Strategic Interaction Group

Abstract: This study investigates the dynamic efficiency of an emission regulation regime where companies competitively pay for emission licences. We embed the emission licence market in a Cournot model where the price of emission licences is subject to strategic tradeoff between licences and abatement technologies. Unlike the standard Cournot model, agents have two action parameters, quantities bought on the licence market and investments into abatement technology. We want to investigate the implications of this market design on the strategic behavior regarding companies' incentives to invest in those technologies. Data from a series of laboratory experiments supports the theoretical predictions for subjects' investment into abatement technology. With respect to the adaptation process of individual quantities for licences we find that a majority of subjects adjusts on the market by imitation while a minority entertains a trial and error notion.

Keywords: Cournot market; emission regulation; experimental economics; dynamic efficiency; learning (search for similar items in EconPapers)
JEL-codes: Q52 Q53 Q55 (search for similar items in EconPapers)
Pages: 19 pages
New Economics Papers: this item is included in nep-ene, nep-env, nep-exp and nep-res
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