CEU Electronic Theses and Dissertations, 2014
| Author | Haita, Corina Madalina |
|---|---|
| Title | Emissions Trading Schemes: Theoretical Modeling and Behavioral Investigation |
| Summary | Emissions Trading Schemes (ETS) have become popular instruments for climate change mitigation since the ratification of the Kyoto Protocol in 1997. Their major appeal is that they require minimum of information on the side of the regulator while the efficient solution for achieving the environmental target is left in the care of market forces. This was firstly shown by the seminal paper of Montgomery (1972), who demonstrated that in a system of tradable pollution permits, market equilibrium coincides with the cost-effective solution and this is independent of how permits are initially allocated to the regulated polluters. The current thesis contributes to the literature on the functioning of the emissions markets, with a focus on the role of auctioning as a method of initial allocation of permits. In three rather independent chapters, the thesis explores the eff ect of various market frictions on the outcome of an ETS. Specifically, the first chapter aims at the theoretical understanding of the eff ectiveness of an ETS in which permits are allocated in an auction followed by a secondary market, and all the ETS-regulated firms exercise market power. Under these conditions the auction clearing price is below the secondary market price. In addition, the high emitters lose while the low emitters gain relative to the case when all firms take permits prices as given. However, if the polluters are not too diff erent in terms of their permits needs, strategic behavior can result in a lower overall compliance cost than in the case of price-taking behavior. In the second chapter I investigate the eff ect of uncertainty and the role of the speculators on the compliance behavior and prots of risk-averse regulated polluters. Contrary to the policy discussion which often ignores the presence of a secondary market when permits are allocated in an auction, the model of this paper shows that when the auction takes place under uncertainty, there will always be trade in the after-market. Moreover, the model shows how firms take into account the possibility for trade when forming their bids in the auction. The model also demonstrates that, under the most realistic assumptions, the presence of the speculators adversely aff ects polluters prots, despite helping the regulator raise more revenue from selling permits. The third chapter searches for the behavioral bias of the sunk-cost fallacy in a laboratory experiment, in which the alternative course of action is explicitly given and part of the initial investment can be recouped. Conditional on subjects understanding the experimental task, I find evidence of the manifestation of the bias, which, however, is independent of the size of the initial investment. Moreover, I find that the higher cognitive ability subjects are more likely to exhibit the bias. Given its design, the findings of the experiment bear implications for emissions permits trading behavior of the regulated firms who purchase permits in an auction. |
| Supervisor | Baniak, Andrzej; Kőszegi, Botond |
| Department | Economics PhD |
| Full text | https://www.etd.ceu.edu/2014/haita_corina.pdf |
Visit the CEU Library.
© 2007-2021, Central European University