Investment Decisions and Emissions Reductions: Results from Experiments in Emissions Trading

Lata Gangadharan (lata.gangadharan@monash.edu), A. Farrell and Rachel Croson

No 942, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: Emissions trading is an important regulatory tool in environmental policy making. Unfortunately the effectiveness of these regulations is difficult to measure in the field due to the unavailability of appropriate data. In contrast, experiments in the laboratory can provide guidance to regulators and legislatures about the performance of different market features in emission trading programs. This paper reports on the implementation of three different institutional designs, and presents experimental results investigating important features of emissions trading regimes: the ability to make investments in emissions abatement, ability to bank allowances and a declining emissions cap, both with and without uncertainty. These features are observed in virtually all existing air pollution emissions trading programs currently in place and will almost certainly be part of future applications. Like previous experimental studies of emissions trading, this paper shows that the efficiency gains expected from economic theory emerge observationally. We also show reduced efficiency when permits are bankable due to over-banking and when investments in emissions abatement are possible due to overinvesting. These tendencies do not worsen, however, when emissions caps decline.

Keywords: Emissions Trading; Investment in Abatement; Banking; Laboratory Experiments (search for similar items in EconPapers)
JEL-codes: C91 Q20 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005
New Economics Papers: this item is included in nep-ene, nep-env, nep-exp and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Chapter: Investment decisions and emissions reductions: results from experiments in emissions trading (2013)
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