Market Power in International Carbon Emissions Trading: A Laboratory Test

Abstract

The MIT Joint Program on the Science and Policy of Global Change is an organization for research, independent policy analysis, and public education in global environmental change. It seeks to provide leadership in understanding scientific, economic, and ecological aspects of this difficult issue, and combining them into policy assessments that serve the needs of ongoing national and international discussions. To this end, the Program brings together an interdisciplinary group from two established research centers at MIT: the Center for Global Change Science (CGCS) and the Center for Energy and Environmental Policy Research (CEEPR). These two centers bridge many key areas of the needed intellectual work, and additional essential areas are covered by other MIT departments, by collaboration with the Ecosystems Center of the Marine Biology Laboratory (MBL) at Woods Hole, and by short-and long-term visitors to the Program. The Program involves sponsorship and active participation by industry, government, and non-profit organizations.To inform processes of policy development and implementation, climate change research needs to focus on improving the prediction of those variables that are most relevant to economic, social, and environmental effects. In turn, the greenhouse gas and atmospheric aerosol assumptions underlying climate analysis need to be related to the economic, technological, and political forces that drive emissions, and to the results of international agreements and mitigation. Further, assessments of possible societal and ecosystem impacts, and analysis of mitigation strategies, need to be based on realistic evaluation of the uncertainties of climate science.This report is one of a series intended to communicate research results and improve public understanding of climate issues, thereby contributing to informed debate about the climate issue, the uncertainties, and the economic and social implications of policy alternatives. Titles in the Report Series to date are listed on the inside back cover. Market Power in International Carbon Emissions Trading: A Laboratory TestBjörn Carlén † AbstractThe prospect that governments of one or a few large countries, or trading blocs, would engage in international greenhouse gas emissions trading has led several policy analysts to express concerns that trade would be influenced by market power. The experiment reported here mimics a case where twelve countries, one of which is a large buyer (the mirror-image of a large seller), trade carbon emissions on an emissions exchange (a double-auction market) and where traders have quite accurate information about the underlying net demand. The findings deviate from those of the standard version of market power effects in that trade volumes and prices converge on competitive levels.

Market Power in Emissions Trading Markets Ruled by a Multiple Unit Double Auction: Further Experimental Evidence

“…Several experiments (Smith 1981;Carlén 1999;Cason et al 2003) confirm this statement. The DA is able to suppress market power and to generate the competitive equilibrium.…”

“…The quantity traded in these markets is very low (in most cases eight permits). In contrast to this, Carlén (1999) has used a multiple-unit DA in a market with a large quantity traded. Information to subjects There are several approaches regarding the information about the market structure subjects received.…”

“…subjects can either sell or buy permits according to their initial endowment. Later experiments (Carlén 1999;Muller et al 2002; Sturm forthcoming) have generally implemented speculation as a central property of real markets. Multiple-unit property Most experiments use a single-unit version of the DA, i.e., only one permit can be simultaneously bought or sold.…”

Potential impact of (CET) carbon emissions trading on China’s power sector: A perspective from different allowance allocation options

“…They analyzed the impact of this competition on the pricing of emissions permits and on the effectiveness of the Kyoto and post-Kyoto agreements, without US participation. Carlén investigate market power in intergovernmental CET based on a simulation [10]. They find that (i) the presence of a large trader is not likely to create inefficiencies, and (ii) a large trader is not likely to be able to substantially influence prices to its advantage during end-period trading.…”

Intra-union flexibility of non-ETS emission reduction obligations in the European Union

“…The ability to exert market power depends on the structure of the market, no proposals for which have yet been made. However, a continuous double auction may be the most appropriate choice in situations like this (Carlen 2003). Table 4 shows the total costs of emission reduction, here presented as a percent of GDP in 2020.…”