Testing the theory of emissions trading: Experimental evidence on alternative mechanisms for global carbon trading

Simulation models and theory prove that emission trading converges to market equilibrium. This paper sets out to test these results using experimental economics. Three experiments are conducted for the six largest carbon emitting industrialized regions. Two experiments use auctions, the first a sing...

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Bibliographic Details
Published in:Ecological economics 2005-04, Vol.53 (1), p.47-58
Main Authors: Klaassen, Ger, Nentjes, Andries, Smith, Mark
Format: Article
Language:English
Subjects:
Auctions
Carbon dioxide
Competition
Distribution
Economic equilibrium
Efficiency
Emissions trading
Environmental economics
Experiment
Experimental economics
Greenhouse effect
Market structure
Pollution
Prices
Trade
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Summary:Simulation models and theory prove that emission trading converges to market equilibrium. This paper sets out to test these results using experimental economics. Three experiments are conducted for the six largest carbon emitting industrialized regions. Two experiments use auctions, the first a single bid auction and the second a Walrasian auction. The third relies on bilateral, sequential trading. The paper finds that, in line with the standard theory, both auctions and bilateral, sequential trading capture a significant part (88% to 99%) of the potential cost savings of emission trading. As expected from trade theory, all experiments show that the market price converges (although not fully) to the market equilibrium price. In contrast to the theory, the results also suggest that not every country might gain from trading. In both the bilateral trading experiment and the Walrasian auction, one country actually is worse off with trade. In particular bilateral, sequential trading leads to a distribution of gains significantly different from the competitive market outcome. This is due to speculative behavior, imperfect foresight and market power.
ISSN:0921-8009
1873-6106
DOI:10.1016/j.ecolecon.2004.12.017