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Regulated and non-regulated companies, technology adoption in experimental markets for emission permits, and options contracts

Chesney, Marc and Taschini, Luca and Wang, Mei (2011) Regulated and non-regulated companies, technology adoption in experimental markets for emission permits, and options contracts. Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment working papers, 41. Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment, London, UK.

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Identification Number: 41

Abstract

This paper examines the investment strategies of regulated companies in abatement technologies, market participants' trading behaviors, and the liquidity level in an inter-temporal cap{and{trade market using laboratory experiments. The experimental analysis is performed under varying market structures: the exclusive presence of regulated companies; the inclusion of subjects not liable for compliance with environmental regulations; the availability of plain vanilla options. In line with theoretical models on irreversible abatement investment, the first experiment shows that regulated companies trade permits at a premium. At the same time the existence of a strict enforcement structure effectively prompts investments in new technologies. The second experiment shows that the presence of non-regulated companies adds liquidity to the market and does not increase price volatility. The last experiment enables us to investigate the impact of the presence of cash-settled options contracts on the trading strategies of regulated companies. Their expected emissions appears to play a signifcant role in the choice of their options strategy.

Item Type: Monograph (Working Paper)
Official URL: http://www2.lse.ac.uk/GranthamInstitute/Home.aspx
Additional Information: © 2011 The Authors
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HC Economic History and Conditions
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Collections > Economists Online
Date Deposited: 25 Jul 2011 13:36
Last Modified: 02 Aug 2011 14:08
URI: http://eprints.lse.ac.uk/id/eprint/37577

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