Elements of Emission Market Design: An Experimental Analysis of California's Market for Greenhouse Gas Allowances

Posted: 28 Jun 2014

See all articles by William Shobe

William Shobe

University of Virginia - Center for Economic and Policy Studies; Frank Batten School of Leadership and Public Policy

Charles A. Holt

University of Virginia - Department of Economics

Thaddeus Huetteman

Power & Energy Analytic Resources, Inc.

Date Written: April 24, 2014

Abstract

We use a set of economic experiments to test the effects of some novel features of California’s new controls on greenhouse gas emissions. The California cap and trade scheme imposes limits on allowance ownership, uses a tiered price containment reserve sale, and settles allowance auctions based on the lowest accepted bid. We examine the effects of these features on market liquidity, efficiency, and price variability. We find that tight holding limits substantially reduce banking, which, in turn reduces market liquidity. This impairs the ability of traders to smooth prices over time, resulting in lower efficiency and higher price variability. The price containment reserve, while increasing the supply of allowances available to traders, does not appear to mitigate the effects of tight holding limits on market outcomes. As a result, the imposition of holding limits in the allowance market may have the consequence of increasing the likelihood of the market manipulation that they were intended to prevent. Finally, we find that the choice between lowest accepted bid and highest rejected bid for the allowance auction pricing rule does not have a significant effect on market outcomes.

Suggested Citation

Shobe, William and Holt, Charles A. and Huetteman, Thaddeus, Elements of Emission Market Design: An Experimental Analysis of California's Market for Greenhouse Gas Allowances (April 24, 2014). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2459485

William Shobe (Contact Author)

University of Virginia - Center for Economic and Policy Studies ( email )

Box 400206
Charlottesville, VA 22904-4206
United States
434-982-5376 (Phone)

HOME PAGE: http://www.virginia.edu/ceps

Frank Batten School of Leadership and Public Policy ( email )

235 McCormick Rd.
P.O. Box 400893
Charlottesville, VA 22904-4893
United States
434-982-5376 (Phone)

HOME PAGE: http://people.virginia.edu/~wms5f

Charles A. Holt

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Rouss Hall #114
Charlottesville, VA 22904-4182
United States
(804) 924-7894 (Phone)

Thaddeus Huetteman

Power & Energy Analytic Resources, Inc. ( email )

1650 Wilson Blvd
Arlington, 22209
United States

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