Regulated and Non-Regulated Companies, Technology Adoptionin Experimental Markets for Emission Permits, and OptionsContracts

This paper examines the investment strategies of regulated companies in abatement technologies,market participants' trading behaviors, and the liquidity level in an inter-temporalcap{and{trade market using laboratory experiments. The experimental analysis is performedunder varying market structures: the exclusive presence of regulated companies; the inclusionof subjects not liable for compliance with environmental regulations; the availability of plainvanilla options. In line with theoretical models on irreversible abatement investment, the rstexperiment shows that regulated companies trade permits at a premium. At the same timethe existence of a strict enforcement structure eectively prompts investments in new technologies.The second experiment shows that the presence of non-regulated companies addsliquidity to the market and does not increase price volatility. The last experiment enablesus to investigate the impact of the presence of cash-settled options contracts on the tradingstrategies of regulated companies. Their expected emissions appears to play a signicant rolein the choice of their options strategy. [Marc Chesneya, Luca Taschinib