Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency

Neil Buckley, Andrew Muller and Stuart Mestelman

Department of Economics Working Papers from McMaster University

Abstract: Two approaches to emissions trading are cap-and-trade, in which an aggregate cap on emissions is distributed in the form of allowance permits, and baseline-and-credit, in which firms earn emission reduction credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. This paper reports on a laboratory experiment designed to test the prediction in a laboratory environ- ment in which sub jects representing firms choose emission technologies and output capacities. A computerized environment has been created in which sub jects participate in markets for emission rights and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. Our evidence supports the theoretical prediction that aggregate output and emissions are in- efficiently high under a baseline-and-credit trading plan compared to a corresponding cap-and-trade plan.

JEL-codes: C92 L50 Q58 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2005-05
New Economics Papers: this item is included in nep-ene, nep-env and nep-exp
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2005-04

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