Dynamic Efficiency of EmissionTrading Markets: An ExperimentalStudy

This study investigates the dynamic efficiency of an emissionregulation regime where companies competitively pay for emissionlicences. We embed the emission licence market in a Cournotmodel where the price of emission licences is subject to strategictradeoff between licences and abatement technologies. Unlikethe standard Cournot model, agents have two action parameters,quantities bought on the licence market and investments intoabatement technology. We want to investigate the implicationsof this market design on the strategic behavior regarding companies’incentives to invest in those technologies. Data from aseries of laboratory experiments supports the theoretical predictionsfor subjects’ investment into abatement technology. Withrespect to the adaptation process of individual quantities for licenceswe find that a majority of subjects adjusts on the marketby imitation while a minority entertains a trial and error notion.