Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative

Lana Friesen; Lata Gangadharan; Peyman Khezr; Ian A. MacKenzie

doi:10.1016/j.jeem.2022.102620

Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative

Lana Friesen, Lata Gangadharan, Peyman Khezr, Ian A. MacKenzie

Department of Economics

Research output: Contribution to journal › Article › Research › peer-review

7 Citations (Scopus)

Abstract

We investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The scheme incorporates two allowance reserves that adjust the supply of allowances in the event of unexpectedly high or low allowance demand. These reserves are enacted if the clearing price breaches a predetermined set of trigger prices. Our experiment finds trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We find the existence of focal points can be explained by both the institutional design and subjects’ behavior. Further, decreasing the range between trigger prices increases total revenue but decreases allocative efficiency. The regulation is more sensitive to changes in trigger prices than reserve quantities.

Original language	English
Article number	102620
Number of pages	24
Journal	Journal of Environmental Economics and Management
Volume	112
DOIs	https://doi.org/10.1016/j.jeem.2022.102620
Publication status	Published - Mar 2022

Keywords

Experiment
Pollution allowances
Supply reserve

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10.1016/j.jeem.2022.102620

Cite this

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title = "Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative",

abstract = "We investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The scheme incorporates two allowance reserves that adjust the supply of allowances in the event of unexpectedly high or low allowance demand. These reserves are enacted if the clearing price breaches a predetermined set of trigger prices. Our experiment finds trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We find the existence of focal points can be explained by both the institutional design and subjects{\textquoteright} behavior. Further, decreasing the range between trigger prices increases total revenue but decreases allocative efficiency. The regulation is more sensitive to changes in trigger prices than reserve quantities.",

keywords = "Experiment, Pollution allowances, Supply reserve",

author = "Lana Friesen and Lata Gangadharan and Peyman Khezr and MacKenzie, {Ian A.}",

note = "Funding Information: We thank Zhengyang Bao for excellent research assistance and Monash University and the University of Queensland for research funding. We are also grateful for helpful comments provided by audiences at the Monash Environmental Economics Workshop, ESA World Meetings (online) and QUT and QUEX (joint initiative of UQ and Exeter) seminars. The research has ethics approval from the University of Queensland, Business, Economics and Law, Low and Negligible Risk Ethics Sub-Committee (Approval Number 2018000828). Publisher Copyright: {\textcopyright} 2022 Elsevier Inc.",

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language = "English",

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AU - MacKenzie, Ian A.

N1 - Funding Information: We thank Zhengyang Bao for excellent research assistance and Monash University and the University of Queensland for research funding. We are also grateful for helpful comments provided by audiences at the Monash Environmental Economics Workshop, ESA World Meetings (online) and QUT and QUEX (joint initiative of UQ and Exeter) seminars. The research has ethics approval from the University of Queensland, Business, Economics and Law, Low and Negligible Risk Ethics Sub-Committee (Approval Number 2018000828). Publisher Copyright: © 2022 Elsevier Inc.

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N2 - We investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The scheme incorporates two allowance reserves that adjust the supply of allowances in the event of unexpectedly high or low allowance demand. These reserves are enacted if the clearing price breaches a predetermined set of trigger prices. Our experiment finds trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We find the existence of focal points can be explained by both the institutional design and subjects’ behavior. Further, decreasing the range between trigger prices increases total revenue but decreases allocative efficiency. The regulation is more sensitive to changes in trigger prices than reserve quantities.

AB - We investigate the new institutional design for the US Regional Greenhouse Gas Initiative (RGGI). The scheme incorporates two allowance reserves that adjust the supply of allowances in the event of unexpectedly high or low allowance demand. These reserves are enacted if the clearing price breaches a predetermined set of trigger prices. Our experiment finds trigger prices act as focal points: the distribution of clearing prices is bimodal and aligns with the trigger prices. We find the existence of focal points can be explained by both the institutional design and subjects’ behavior. Further, decreasing the range between trigger prices increases total revenue but decreases allocative efficiency. The regulation is more sensitive to changes in trigger prices than reserve quantities.

KW - Experiment

KW - Pollution allowances

KW - Supply reserve

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ER -

Mind your Ps and Qs! Variable allowance supply in the US Regional Greenhouse Gas Initiative

Abstract

Keywords

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