Regulated and non-regulated companies, technology adoption in experimental markets for emission permits, and options contracts

Marc Chesney, Luca Taschini and Mei Wang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper examines the investment strategies of regulated companies in abatement technologies, market participants' trading behaviors, and the liquidity level in an inter-temporal cap{and{trade market using laboratory experiments. The experimental analysis is performed under varying market structures: the exclusive presence of regulated companies; the inclusion of subjects not liable for compliance with environmental regulations; the availability of plain vanilla options. In line with theoretical models on irreversible abatement investment, the first experiment shows that regulated companies trade permits at a premium. At the same time the existence of a strict enforcement structure effectively prompts investments in new technologies. The second experiment shows that the presence of non-regulated companies adds liquidity to the market and does not increase price volatility. The last experiment enables us to investigate the impact of the presence of cash-settled options contracts on the trading strategies of regulated companies. Their expected emissions appears to play a signifcant role in the choice of their options strategy.

Keywords: abatement strategy; irreversible investments; participation restrictions; market liquidity; options trading (search for similar items in EconPapers)
JEL-codes: C02 C91 D40 Q50 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-03-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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