An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets David F. Perkis Department of Agricultural Economics, Purdue University
[email protected] Timothy N. Cason Department of Economics, Krannert School of Management, Purdue University
[email protected] Wallace E. Tyner Department of Agricultural Economics, Purdue University
[email protected] May 2014 Abstract Tradable emissions permits have been implemented to control pollution levels in various markets and represent a major component of legislative efforts to control greenhouse gas (GHG) emissions. Because permits are supplied for a fixed level of pollution, allowing the market for permits to determine the price, price control mechanisms may be needed to protect firms from price spikes caused by fluctuations in the demand for permits. We test permit markets in an experimental laboratory setting to determine the effectiveness of several price control mechanisms, with special attention on the soft price ceiling. We focus on a static setting similar to some of the earliest experimental work focused on price ceilings. Results indicate that both permit supply adjustments and price ceilings (hard ceilings) effectively limit elevated prices in this setting. By contrast, reserve auctions to implement soft ceilings do not consistently control prices, especially when a minimum reserve permit price is applied. Furthermore, the grandfathering of permits allows permit sellers to realize significant welfare gains at the expense of buyers under a soft ceiling policy. Our results thus highlight several advantages of hard ceilings for controlling short term price increases. Keywords : greenhouse gases ; hard price ceiling ; laboratory economic experiments; pollution controls ; price controls ; reserve auction ; soft price ceiling ; tradable emissions permit market (1) Introduction Emissions permit markets have been established for many pollutants to control environmental degradation.