Emission Trading with Shares and Coupons:
A Laboratory Experiment
R. Andrew Muller
Stuart Mestelman
McMaster University
Hamilton, Ontario,
Canada
L8S 4M6
1994
Abstract
Increasing attention is being paid to emission trading programs for the control of air and water
pollution. The United States EPA has implemented a tradable emission allowance program for
sulphur oxide. The EPA auction has been investigated in the laboratory by Cronshaw and
Brown-Kruse and by Franciosi, Isaac, Pingry, and Reynolds. A somewhat different proposal has
been made for controlling nitrous oxides in southern Ontario. Trade would occur in coupons
(emission permits) and shares (entitlements to coupons). This paper reports a laboratory
investigation of the Canadian proposal in which the experimental design developed by Cronshaw
and Brown-Kruse was modified to reflect the proposed Canadian institution. The results indicate
dispersed but relatively stable prices, higher efficiency than obtained in related experiments
modelling the EPA plan, and little arbitrage between share and coupon prices. The results could
be due to differences in the market institutions or the training of the subjects.
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