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An experimental analysis of grandfathering vs dynamic auctioning in the EU ETS

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Abstract

This study constitutes a first attempt to experimentally test the performance of a 100% auction versus a 100% free allocation of CO2 permits under the rules and parameters that mimic the EU ETS (imperfect competition, uncertainty in emissions’ control, and allowing banking). It also incorporates a first attempt to include in the analysis measures of the risk preferences of subjects participating in emission permits experiments. Another distinctive feature of this study is the implementation of a theoretically appropriate auction format for the primary allocation of emission permits. Our experimental results indicate that the EU ETS has the potential to reduce CO2 emissions, achieving targets considerably more restrictive than the current ones at high efficiency levels, both with auctioned and free emission permits. Auctioning, however, reveals a clear potential to do better than grandfathering the initial allocation of permits. In addition, the results reveal that concerns about undue scarcity, and corresponding high prices, in secondary markets generated by a primary auction market are not warranted under the proposed dynamic auction format.

Suggested Citation

  • Anabela Botelho & Eduarda Fernandes & Lígia Costa Pinto, 2010. "An experimental analysis of grandfathering vs dynamic auctioning in the EU ETS," NIMA Working Papers 39, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho.
    • Handle: RePEc:nim:nimawp:39/2010
    DOI: 10.1108/S0193-2306(2011)0000014005
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    Cited by:

    1. Anabela Botelho & Lígia Costa Pinto & Eduarda Fernandes, 2013. "More on the dynamic Vickrey mechanism for multi-unit auctions: an experimental study on the emission permits initial auction," NIMA Working Papers 53, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho.
    2. Eva Camacho-Cuena & Till Requate & Israel Waichman, 2012. "Investment Incentives Under Emission Trading: An Experimental Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(2), pages 229-249, October.
    3. Tellez Foster, Edgar & Rapoport, Amnon & Dinar, Ariel, 2017. "Groundwater and electricity consumption under alternative subsidies: Evidence from laboratory experiments," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 41-52.
    4. Liu, Liwei & Sun, Xiaoru & Chen, Chuxiang & Zhao, Erdong, 2016. "How will auctioning impact on the carbon emission abatement cost of electric power generation sector in China?," Applied Energy, Elsevier, vol. 168(C), pages 594-609.

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    More about this item

    Keywords

    EU ETS; auctioning; grandfathering; banking; Ausubel auction;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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