Emission Trading with Shares and Coupons: A Laboratory Experiment

Abstract

Increasing attention is being paid to emission trading programs for the control of air and water pollution. The United States EPA has implemented a tradable emission allowance program for sulphur oxides. The EPA auction has been investigated in the laboratory by Cronshaw and Brown Kruse and by Franciosi, Isaac, Pingry and Reynolds. A somewhat different proposal has been made for controlling nitrous oxides in southern Ontario. Trade would occur in coupons (emission permits) and shares (entitlements to coupons). This paper reports a laboratory investigation of the Canadian proposal in which the experimental design developed by Cronshaw and Brown Kruse was modified to reflect the proposed Canadian institution. The results indicate dispersed but relatively stable prices, higher efficiency than obtained in related experiments modelling the EPA plan, and little arbitrage between share and coupon prices. The results could be due to differences in the market institutions or the training of subjects.