Browsing by Author "Godby, Rob"

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Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain
(1995) Godby, Rob; Mestelman, Stuart; Muller, R. Andrew; Welland, Douglas
"Two important decisions in designing markets for tradable emissions permits are whether to allow banking and whether to allow trading in entitlements to future permits. Banking is predicted to reduce price instability when firms trade in a reconciliation market after the quantity of emissions has been determined. Tradable entitlements ('shares') are a common feature in proposals for emissions trading in Canada. We conduct a laboratory experiment to investigate how bankable coupons and tradable shares affect efficiency and prices under alternative conditions of certainty and uncertainty. Cognitive demands on the subjects are reduced by computerized advice on the optimal allocation of coupons across periods and the implied marginal values of coupons and shares. Banking, share trading and uncertainty conditions are introduced in a complete factorial design with 3 observations per cell. High efficiencies are observed across all treatments. Substantial price instability is observed when control of emissions is uncertain. Coupon Banking reduces this instability. Share trading reduces trading volumes, increases price stability and improves efficiency, particularly when combined with banking."
Strategic Manipulation of Pollution Permit Markets: An Experimental Approach
(1995) Brown-Kruse, Jamie; Elliott, Steven R.; Godby, Rob
"In this paper we employ experimental economic methods to examine the effect of market structure on the use of marketable emissions permits. In particular, we ask whether firms can strategically manipulate a product market using marketable emissions permits. Subjects participate in two markets, a permit market and a product market. They use permits to reduce the cost of production of the final goods that they sell in the product market. Four treatments are used to test the effects of initial permit allocation and market structure. The first two treatments explore 'simple' manipulation. In this case firms are all price takers in the product market but must compete for permits. In the second two treatments the experiment is expanded so that firms compete both in the permit and in final product markets, thus opening the potential use of permits as a form of market predation. Results show that in a market with one dominant firm and a number of fringe firms, strategic manipulation occurs repeatedly in the laboratory as the dominant firm uses licenses in an inefficient manner in order to minimize its costs, increase its profits and exclude rivals in the product market. Further these findings indicate, that far from improving market efficiency and decreasing the cost to society of pollution control, implementation of tradable permit markets where there are firms in a position of market power may decrease efficiency."