IMPLICATIONS OF ALTERNATIVE EMISSION TRADING PLANS: EXPERIMENTAL EVIDENCE

Abstract. Two approaches to emissions trading are cap‐and‐trade, with an aggregate cap on emissions distributed as emission allowances, and baseline‐and‐credit, with firms earning emission reduction credits for emissions below baselines. Theory suggests the long‐run equilibria of the plans will differ with baselines proportional to output. To test this prediction we develop a computerized environment in which subjects representing firms can adjust their emission rates and capacity levels and trade emission rights in a sealed‐bid auction. Demand for output is simulated. We report on six laboratory sessions with variable emissions rates, but fixed capacity: three each with the cap‐and‐trade and baseline‐and‐credit mechanisms.