Scandinavian Working Papers in Economics

Working Papers,
Swedish National Road & Transport Research Institute (VTI)

No 2009:1: Pricing Strategies Under Emissions Trading: An Experimental Analysis

Svante Mandell (), Markus Wråke, Erica C. Myers, Dallas Burtraw and Charles A. Holt
Additional contact information
Svante Mandell: vti - Swedish National Road and Transport Research Institute, Postal: Dept. of Transport Economics, P.O. Box 55685, SE-102 15 Stockholm, Sweden
Markus Wråke: IVL
Erica C. Myers: RFF - Resources for the future
Dallas Burtraw: RFF - Resources for the future
Charles A. Holt: University of Virginia - Department of Economics

Abstract: An important feature in the design of an emissions trading program is how emissions allowances are initially distributed into the market. In a competitive market the choice between an auction and free allocation should, according to economic theory, not have any influence on firms’ production choices nor on consumer prices. However, many observers expect the method of allocation to affect product prices. This paper reports on the use of experimental methods to investigate behavior with respect to how prices will be determined under a cap-and-trade program. Participants initially display a variety of pricing strategies. However, given a simple economic setting in which earnings depend on this behavior, we find that subjects learn to consider the value of allowances and overall behavior moves toward that predicted by economic theory.

Keywords: carbon dioxide; climate change; emissions trading; distributional effects; electricity; allocation; auctions

JEL-codes: C91; D44

31 pages, January 13, 2009

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