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Regulated and non-regulated companies, technology adoption in experimental markets for emission permits, and options contracts

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  • Chesney, Marc
  • Taschini, Luca
  • Wang, Mei

Abstract

This paper examines the investment strategies of regulated companies in abatement technologies, market participants' trading behaviors, and the liquidity level in an inter-temporal cap{and{trade market using laboratory experiments. The experimental analysis is performed under varying market structures: the exclusive presence of regulated companies; the inclusion of subjects not liable for compliance with environmental regulations; the availability of plain vanilla options. In line with theoretical models on irreversible abatement investment, the first experiment shows that regulated companies trade permits at a premium. At the same time the existence of a strict enforcement structure effectively prompts investments in new technologies. The second experiment shows that the presence of non-regulated companies adds liquidity to the market and does not increase price volatility. The last experiment enables us to investigate the impact of the presence of cash-settled options contracts on the trading strategies of regulated companies. Their expected emissions appears to play a signifcant role in the choice of their options strategy.

Suggested Citation

  • Chesney, Marc & Taschini, Luca & Wang, Mei, 2011. "Regulated and non-regulated companies, technology adoption in experimental markets for emission permits, and options contracts," LSE Research Online Documents on Economics 37577, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:37577
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    File URL: http://eprints.lse.ac.uk/37577/
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    References listed on IDEAS

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    Cited by:

    1. Mohajan, Haradhan, 2012. "Certainty and Uncertainty in Cap and Trade System or in Carbon Tax for Green Accounting to Decrease Greenhouse gas Emissions," MPRA Paper 50669, University Library of Munich, Germany, revised 20 Dec 2012.
    2. Silvester van Koten, 2014. "Do Emission Trading Schemes Facilitate Efficient Abatement Investments? An Experimental Study," CERGE-EI Working Papers wp503, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    Keywords

    abatement strategy; irreversible investments; participation restrictions; market liquidity; options trading;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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