Opportunity cost for free allocations of emissions permits: An experimental analysis

Markus Wråke, Erica Myers, Dallas Burtraw, Svante Mandell, Charles Holt

Research output: Contribution to journalArticle

Abstract

An important feature of emissions trading is how emissions permits are allocated. The choice between an auction and free allocation should not influence firms' production choices nor consumer prices according to economic theory. However, many parties expect the method of allocation to affect product prices. This paper describes an experimental investigation into price determination under a cap-and-trade program with different allocation methods. Participants initially display diverse pricing strategies. However, given a simple economic setting in which earnings depend on behavior, we find that subjects learn to consider the opportunity cost of permits and overall behavior moves toward the economic prediction.

Original languageEnglish (US)
Pages (from-to)331-336
Number of pages6
JournalEnvironmental and Resource Economics
Volume46
Issue number3
DOIs
StatePublished - Jan 1 2010
Externally publishedYes

Keywords

  • Auction
  • Emissions allowances
  • Grandfathering

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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