Emissions trading without a quantity constraint.

This paper examines the differences between standard “cap-and-trade” emissions trading plans and “credit” plans in which individual agents create credits by reducing emissions below a firmspecific baseline. The two are equivalent if the baseline is a fixed quantity, but not if the baseline is specified as a baseline emissions ratio times current output. In the latter case there is no exogenous constraint on aggregate emissions. It may be called the case of “(ratio-based) credit trading”. Examples include the Clean Development Mechanism (CDM) of the Kyoto Protocol and the Canadian Pilot Emissions Reduction Trading plan (PERT). Unlike the case of cap-and-trade, the theoretical properties of ratio-based credit trading plans are not well known. In the absence of a binding quantity constraint, it is even difficult to understand how an ERC plan can generate a positive price. This paper studies the difference between ratiobased credit trading and conventional “cap-and-trade” plans in the context of a very simple model. It also considers how the two plans might interact if, for example, credits from a credit plan could be applied to commitments under a quantity-based cap-and-trade plan, and applies its findings to current plans for credit trading, including PERT and the clean development mechanism. The paper demonstrates that ratio-based credit trading is more like a tax instrument than a quantity instrument. It shows that there is no incentive to trade in a ratio-based market in which all firms receive baselines computed using their “business as ususal” emission ratios. Combining ratio-based credit trading with “cap-and-trade” allowance markets effectively relaxes the quantity constraint in the cap-and-trade plan and reduces the price of traded allowances. In the long run, there will be no effective constraint on emissions. The results have strong implications for current policy. In particular, they suggest that mixing quantity-based and ratio-based emission trading plans is inappropriate.

On The Use and Misuse of Input-Output Based Impact Analysis in Evaluation

Estimates of economic activity generated and jobs created that are derived using input-output analysis are often presented in program evaluations and confused with the benefits resultin g from die program. Two such cases are presented as examples. We argue that for two main reasons this type of analysis con stitutes a misuse of input-output analysis. First, input-output estimates generated using the Keynesian closed versions of input-output models are biased upwards because they ignore the price and financial feedbacks that tend to reduce multipliers in macro-economic models. Second, and more important, it is inappropria te to consider induced effects resulting from a particular program in isolation, because such effects can only be properly considered in the aggr egate at th e level of overall stabilization policy. In this paper we contend that cost-benefit analysis, with its assumption of full employment, is the most appropriate tool for analyzing the benefits resulting from particular programs. Input-output analysis should be confin ed to providing estimates of die industr ial or regional breakdown of the direct impact of a program or of the employment impacts of program spending. It should not be used to generate Keynesian multipliers.input-output analysis, Keynesian multiplier, evaluation

Long-Run Implications of Alternative Emission Trading Plans: An Experiment with Robot Traders

Two approaches to emmisions trading are cap-and-trade, in which an aggragate cap on emmisions is distributed in the form of permits, and baseline-and-credit, in which firms earn credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. This paper reports on a laboratory environment designed to test this prediction. A computerized environment has been created in which subjects representing firms choose capacity and emission rates and participate in markets for permits or credits and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. The timing of decisions was adjusted to avoid short-run instability. The paper reports the parameterization for an experiment with human traders and results of a simulated experiment using robots.

Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity

Two approaches to emissions trading are cap-and-trade, in which an aggregate cap on emissions is distributed in the form of allowance permits, and baseline-and-credit, in which firms earn emission reduction credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. As a progressive step towards testing the full long-run model, this paper reports on a laboratory experiment designed to test the prediction under fixed emission rates and variable output capacity. A computerized environment has been created in which sub jects representing firms choose output capacities under fixed emission technology and participate in markets for emission rights and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. Our evidence supports the theoretical prediction that aggregate output and emissions are inefficiently high under a baseline-and-credit trading plan compared to a corresponding cap-and-trade plan.

Long-Run Implications of Alternative Emission Trading Plans: An Experiment with Robot Traders

Two approaches to emissions trading are cap-and-trade, in which an aggregate cap on emissions is distributed in the form of permits, and baseline-and-credit, in which firms earn credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. This paper reports on a laboratory environment designed to test this prediction. A computerized environment has been created in which subjects representing firms choose capacity and emission rates and participate in markets for permits or credits and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. The timing of decisions was adjusted to avoid short-run instability. The paper reports the parameterization for an experiment with human traders and results of a simulated experiment using robots.

Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency

Two approaches to emissions trading are cap-and-trade, in which an aggregate cap on emissions is distributed in the form of allowance permits, and baseline-and-credit, in which firms earn emission reduction credits for emissions below their baselines. Theoretical considerations suggest the long-run equilibria of the two plans will differ if baselines are proportional to output, because a variable baseline is equivalent to an output subsidy. This paper reports on a laboratory experiment designed to test the prediction in a laboratory environ- ment in which sub jects representing firms choose emission technologies and output capacities. A computerized environment has been created in which sub jects participate in markets for emission rights and for output. Demand for output is simulated. All decisions are tracked through a double-entry bookkeeping system. Our evidence supports the theoretical prediction that aggregate output and emissions are in- efficiently high under a baseline-and-credit trading plan compared to a corresponding cap-and-trade plan.

Output Sharing Among Groups Exploiting Common Pool Resources

This paper provides an experimental testing ground for an equal output-sharing partnership approach as a common pool resource (CPR) management instrument. It examines the behaviour of resource users in output-sharing partnerships of different sizes, and evaluates the impact of partnership size and the way partners are assigned on effort (extraction) levels. Experimental results are very close to Nash predictions, and confirm that group size significantly affects resource user’s effort supply. The first best solution is achieved, when resource users are privately extracting from the CPR and equally sharing their output with the socially optimal number of partners. The way partners are allocated (randomly or with the same partners over 15 periods) does not significantly affect aggregate effort contributions. Income distribution, however, is more equitable with random allocation of partners than with fixed partners.