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). 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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