An Experimental Analysis of Grandfathering Versus Dynamic Auctioning in the EU ETS

Abstract

This study constitutes a first attempt to experimentally test the performance of a 100% auction versus a 100% free allocation of CO 2 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 CO 2 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.

Cultural alignment and intergenerational succession in family firms: a game-theoretical experiment

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Groundwater and electricity consumption under alternative subsidies: Evidence from laboratory experiments

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Dynamic Efficiency in Experimental Emissions Trading Markets with Investment Uncertainty

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