Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain
Robert Godby
Stuart Mestelman
R. Andrew Muller
Douglas Welland
McMaster University
Hamilton, Ontario,
Canada
L8S 4M4
Deptartment of Economics
McMaster University
Working Paper No. 95-09
June 1995
Abstract
Two important decisions in designing markets for tradable emissions permits are whether to
allow banking and whether to allow trading in entitlements to future permits. Banking is
predicted to reduce price instability when firms trade in a reconciliation market after the quantity
of emissions has been determined. Tradable entitlements, "shares", are a common feature in
proposals for emissions trading in Canada. We conduct a laboratory experiment under
uncertainty. Cognitive demands on the subjects are reduced by computerized advice on the
optimal allocation of coupons across periods and the implied marginal values of coupons and
shares. Banking, share trading, and uncertainty conditions are introduced in a complete factorial
design with 3 observations per cell. High efficiencies are observed across all treatments.
Uncertainty in the control of emissions leads to substantial price instability when banking is not
allowed. Coupon banking virtually eliminates the instability. Share trading reduces trading
volumes, increases price stability, and improves efficiency, particularly when combined with
banking.
McEEL Publications and Current Research
McEEL Home Page
Webmaster: mullera@.mcmaster.ca
Last updated: March 28, 1996