Emissions Trading with Shares and Coupons:
A Laboratory Test of Canadian Proposals
Stuart Mestelman
Rob Moir
R. Andrew Muller
McMaster Unviersity
Hamilton, Ontario,
Canada
L8S 4M4
June 1993
Abstract
A proposal for nitrogen oxide trading in Canada would create a private market in two
commodities: coupons and shares. Coupons authorize the discharge of NOx and are bankable.
Shares are time streams of future allocations of coupons. In contrast, SOx trading under the U.S.
Clean Air Act has no provision for shares and provides for a mandatory revenue neutral
government auction. Cronshaw and Brown-Kruse and Franciosi, Isaac, Pingry, and Reynolds
have investigated the U.S. market experimentally. This paper reports altering the Cronshaw and
Brown-Kruse design to reflect the Canadian proposal. Laboratory results yield a market outcome
with efficiency higher than obtained in other environments. Arbitrage between coupon and share
prices is imperfect. The training of subjects appears to be an important variable in determining
market performance.
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