Chapter 69 Share Trading and Coupon Banking Interact to Improve Performance in Emission Trading Markets

Emissions trading refer to the exchange of permits conveying the legal right to discharge specified quantities of waste. Unlike naturally occurring markets for many commodities and services, emissions trading markets are the product of deliberate choices by regulatory authorities. Frequently these choices must be made without practical experience or clear guidance from theory. Laboratory experiments are well suited to investigating such choices without the high economic and political cost of field trials. Under a typical emissions trading plan the regulatory authority sets a quota on the total allowable discharge of a specified waste during each control period. This quota is distributed among eligible firms in the form of permits which we shall call coupons. Some rule is required to determine the allocation of coupons among firms. Normally firms' initial shares of coupons will be proportional to their shares of pre-regulatory emissions, perhaps adjusted to reflect some standard of best practice. Firms are then free to trade coupons among themselves.