Job Market Paper, November 8th 2004
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 instituted in the form of an emission
technology performance standard because this creates a subsidy to
output that results in increased emissions. This is in opposition to
the prediction that, when firm output capacity is fixed, the
short-run equilibria of the two plans will be identical. As a first
step towards testing the long-run model, this paper reports on a
laboratory experiment designed to test the short-run prediction. A
computerized environment has been created in which subjects
representing firms choose emission echnologies under fixed output
capacity and participate in markets for emission rights and for
output. Our evidence supports the theoretical prediction that the
two trading mechanisms yield similar aggregate emissions, however
significant differences between plan outcomes are discussed and both
plans exhibit significant deviations from the predicted
equilibrium.
Neil J. Buckley, "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence", November 2004, Manuscript. [Abstract | pdf | Appendix A (Screenshots) | Appendix B (Instructions)]
Send Correspondence to:
Neil J. Buckley
Department of Economics
McMaster University
Hamilton, Ontario L8S 4M4
Canada
e-mail: nbuckley@mcmaster.ca