Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies

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:

1. enhance the exchange of permits, helping the system to achieve a zero-excess permit position,
2. increase the price levels, but has no apparent effect on price variability.

Reference

Taschini, Luca, Chesney, Marc and Wang, Mei (2014) Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies. Journal of Regulatory Economics, Online . pp. 1-28. ISSN 0922-680X (In Press)