Elements of emission market design: an experimental analysis of California's market for greenhouse gas allowances

William Shobe, Charles Holt and Thaddeus Huetteman ()
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Thaddeus Huetteman: PEAR, Inc.

No 2014-01, Working Papers from Center for Economic and Policy Studies

Abstract: We use a set of economic experiments to test the effects of some novel features of California's new controls on greenhouse gas emissions. The California cap and trade scheme imposes limits on allowance ownership, uses a tiered price containment reserve sale, and settles allowance auctions based on the lowest accepted bid. We examine the effects of these features on market liquidity, efficiency, and price variability. We find that tight holding limits substantially reduce banking, which, in turn reduces market liquidity. This impairs the ability of traders to smooth prices over time, resulting in lower efficiency and higher price variability. The price containment reserve, while increasing the supply of allowances available to traders, does not appear to mitigate the effects of tight holding limits on market outcomes. As a result, the imposition of holding limits in the allowance market may have the consequence of increasing the likelihood of the market manipulation that they were intended to prevent. Finally, we find that the choice between lowest accepted bid and highest rejected bid for the allowance auction pricing rule does not have a significant effect on market outcomes.

Keywords: cap and trade; uniform price auction; market liquidity; price containment reserve; emission markets; carbon markets (search for similar items in EconPapers)
JEL-codes: C92 D44 D47 H2 Q5 Q54 (search for similar items in EconPapers)
Date: 2014-04-29
Note: This is a revised version of a paper formerly entitled: Banking and price containment in California's greenhouse gas emissions market: an experimental analysis of market design Journal of Economic Behavior and Organization Vol. 107, pp. 402-420.
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Published in: Journal of Economic Behavior and Organization, 2014

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