Dynamic Efficiency in Experimental Emissions Trading Markets with Investment Uncertainty

Citation

Cason TN & de Vries F (2019) Dynamic Efficiency in Experimental Emissions Trading Markets with Investment Uncertainty. Environmental and Resource Economics, 73 (1), pp. 1-31. https://doi.org/10.1007/s10640-018-0247-7

Abstract
This study employs a laboratory experiment to assess the performance of tradable permit markets on dynamic efficiency arising from cost-reducing investment. The permit allocation rule is the main treatment variable, with permits being fully auctioned or grandfathered. The experimental results show significant investment under both allocation rules in the presence of ex ante uncertainty over the actual investment outcome. However, auctioning permits generally provides stronger incentives to invest in R&D, leading to greater dynamic efficiency compared to grandfathering.

Keywords
Pollution permits; Allowance auction; Grandfathering; Investment incentives; Stochastic R&D; Laboratory experiments

Journal
Environmental and Resource Economics: Volume 73, Issue 1