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Published November 8, 2017 | Submitted
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EPA's New Emissions Trading Mechanism: A Laboratory Evaluation


The EPA has designed a new call auction institution for trading allowances to emit sulfur dioxide. This paper reports twelve laboratory markets that investigate trader behavior in this new institution and evaluate its performance relative to the more commonly observed uniform price call market. We find that the uniform price call market (1) is more efficient, (2) induces more truthful revelation of underlying values and costs, (3) provides more accurate price information, and (4) is more responsive to and recovers more quickly from changes in underlying market conditions. All of these differences result from the intense strategic manipulation incentives of the EPA auction. Under -the EPA auction rules both buyers and sellers misrepresent their true value of the emission permits, which biases market-clearing prices downwards. This suggests that the EPA auction will provide poor price signals to the evolving allowance market.

Additional Information

Revised. Originally dated to November 1993. Financial support was provided by the National Science Foundation and the Caltech Laboratory for Experimental Economics and Political Science. Seema Arora provided valuable research assistance, and Mark Van Boening and seminar participants at Washington University, the 1993 Western Economic Association, the 1993 Economic Science Association and the 1993 Southern Economic Association Conferences provided helpful comments on an earlier draft. Published as Cason, Timothy N. and Plott, Charles R. (1996) EPA's New Emissions Trading Mechanism: A Laboratory Evaluation. Journal of Environmental Economics and Management, 30 (2). pp. 133-160.

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August 20, 2023
August 20, 2023