Experimental Comparison between Markets on Dynamic Permit Trading and Investment in Irreversible Abatement with and without Non-Regulated Companies

Grantham Research Institute on Climate Change and the Environment Working Paper No. 41

Centre for Climate Change Economics and Policy Working Paper No. 51

32 Pages Posted: 4 Dec 2010 Last revised: 12 Oct 2013

See all articles by Luca Taschini

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Marc Chesney

University of Zurich - Department of Banking and Finance

Mei Wang

WHU - Otto Beisheim School of Management

Date Written: August 13, 2013

Abstract

This paper examines the investment strategies of compliance companies in irreversible abatement technologies and the environmental achievements of the system in an inter-temporal cap-and-trade market using laboratory experiments. The experimental analysis is performed under varying market structures: firstly, in a market that is exclusive to compliance companies and subsequently, in a market that is open to both compliance and non-compliance entities. In line with theoretical models on irreversible abatement investment, the paper shows that regulated companies trade permits at a premium. Also, steep per unit penalties for excess emissions prompt early investments in irreversible abatement technologies. Further, the paper shows that by contributing to the permit demand and supply, non-compliance companies (i) enhance the exchange of permits, helping the system to achieve a zero-excess permit position, (ii) increase the price levels, but has no apparent effect on price variability.

Keywords: Irreversible Abatement, Stochastic Emissions, Dynamic Trading, Participation Restrictions, Non-compliance Entities.

JEL Classification: Q50, C02, C91, D40

Suggested Citation

Taschini, Luca and Chesney, Marc and Wang, Mei, Experimental Comparison between Markets on Dynamic Permit Trading and Investment in Irreversible Abatement with and without Non-Regulated Companies (August 13, 2013). Grantham Research Institute on Climate Change and the Environment Working Paper No. 41, Centre for Climate Change Economics and Policy Working Paper No. 51, Available at SSRN: https://ssrn.com/abstract=1719026 or http://dx.doi.org/10.2139/ssrn.1719026

Luca Taschini (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

Marc Chesney

University of Zurich - Department of Banking and Finance ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/chesney-marc

Mei Wang

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallender, 56179
Germany

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