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Mind your Ps and Qs! An Experiment on Variable Allowance Supply in the US Regional Greenhouse Gas Initiative

Lana Friesen (), Lata Gangadharan, Peyman Khezr () and Ian MacKenzie ()

No 618, Discussion Papers Series from University of Queensland, School of Economics

Abstract: Using an experimental approach, we investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The proposed scheme incorporates two allowance reserves that adjust the initial supply of allowances in the event of unexpectedly high or low allowance demand. In particular, allowance supply is increased when the initial clearing price is above a pre-determined upper trigger price, and decreased when the initial clearing price is below a pre-determined lower trigger price. We provide evidence that these two trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We also show that decreasing the range between the two trigger prices increases total revenue but decreases allocative efficiency. Importantly, we find the regulation is more sensitive to changes in trigger prices than reserve quantities.

Keywords: supply reserve; pollution allowances; experiment. (search for similar items in EconPapers)
JEL-codes: C91 C92 Q58 (search for similar items in EconPapers)
Date: 2020-03-31
New Economics Papers: this item is included in nep-ene, nep-env, nep-exp and nep-reg
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