McMaster Experimental Economics Laboratory R. Andrew Muller
THE CHOICE OF INSTRUMENTS FOR POLLUTION
EMISSION PERMIT TRADING: DESIGNING
A LABORATORY ENVIRONMENT
Stuart Mestelman
R. Andrew Muller
Department of Economics
McMaster University
Hamilton, Ontario
Canada L8S 4M4
e-mail: mestelma@mcmaster.ca
July 1996
Abstract
Important decisions in designing markets for tradable pollution emission
permits have focussed on whether to allow banking of permits and the
selection of the trading institution for the transfer of permits. Recent
studies in laboratory markets suggest that banking will be particularly
important when uncertainty about actual emissions requires trading in a
reconciliation period after the quantity of emissions has been
determined and that the double auction trading institution tends to
outperform others (such as revenue neutral discriminative auctions,
revenue neutral competitive auctions, and open outcry free-form
auctions). The existing laboratory work has not addressed the value of
formal markets in permit futures. Such a market has been included in
several proposals for emissions trading markets in Canada. This paper
describes the laboratory environment created at McMaster University to
evaluated the benefits of a market in entitlements for permits when the
parameters characterizing the environment suggest theoretically that the
existence of entitlement trading is redundant if permits are tradable
and bankable. The results of laboratory testing of entitlement trading
suggests that behaviourally the combination of emissions permit trading
and entitlement trading can interact and increase the efficiency of the
pollution emission trading program.
Full Text [ pdf ]