An Experimental Economic Analysis
of Carbon Trading Options for
Australia
John Tisdell and Corinne Grainger
Atmospheric Environment Research Centre
Griffith University Brisbane Australia
www.economicexperiments.com
Outline
•
•
•
•
•
Background
Research questions
Experimental design and procedures
Experimental results
Conclusions and recommendations
Background
• Government reports: PM Task Force, Garnaut Review, Carbon
Pollution Reduction Scheme
• emissions trajectory, coverage, permit allocation, inter-temporality,
governance and compliance.
• Two main issues..
– Inter-temporal flexibility
Futures and spot markets
– Emissions trajectory
Low or high permit reductions
Inter-temporal flexibility
• In markets for pollution such as greenhouse gases, intertemporal flexibility plays a large role in ensuring market
success (Stavins 1998; Stern 2007).
Emissions trajectory
• The trajectory chosen to achieve the final level of stabilisation
is of as much importance in determining the costs of
mitigation, as the actual level of final stabilisation
(Goulder and Mathai 2000; Grübler and Messner 1998; Jaffe et al. 1999,
2002; Manne and Richels 1997, 2004; Richels and Edmonds 1995;
Schneider and Goulder 1997; Wigley et al. 1996)
Emissions Trajectory
•
PM Task Force Report 2007
6
Research questions
1. Emissions trajectory
Does the rate of decline in carbon permits impact on
compliance?
2. Inter-temporal flexibility
Do futures markets produce better results than simple spot
markets in terms of compliance and market activity?
Experimental design and procedures
High Reduction
Low Reduction
(HR)
(LR)
Spot Market
4 sessions
4 sessions
(SM)
10 periods
10 periods
Futures Market
4 sessions
4 sessions
(FM)
10 periods
10 periods
Experimental Environment
• Players were informed that they were the producer of a fictitious good
and that they could produce this good up to a maximum production level.
• They were provided with a simple production function and marginal value
for the good. They were also provided with a stock of carbon permits
which declined over time.
• For each unit they produced they were required to hold a permit.
• Players faced random auditing and if found to have less permits than their
production they would face a fine.
• The aim was to maximise their earnings taking into account their earnings
from production, trade and any fines they may receive.
• Instructions and Quiz:
http://www.ens.gu.edu.au/Johnt/carbon_paper_1/
Computer Screens
Income Table
Future Trading Table
Experimental Parameters
Player
1
2
3
4
5
6
7
8
40
60
80
100
120
140
160
180
2
3
4
5
6
7
8
9
10
Low 90
86
82
78
74
70
66
62
54
50
High 90
83
76
69
62
55
48
41
34
27
Marginal Value
Pd
1
Modeled equilibrium prices and
associated fines
Low
High
Period
1
2
3
4
5
6
7
8
9
10
Equilibrium
Price
50
50
70
70
70
90
90
90
90
110
Penalty
125
125
175
175
175
225
225
225
225
275
Equilibrium
Price
50
70
70
90
90
110
110
130
130
150
Penalty
125
175
175
225
225
275
275
325
325
375
Experimental results
• Level of Compliance
– Differential between production and carbon permit
holdings
• Convergence
– Market prices and quantities to CE
Convergence of market prices through rounds
Spot - Low reduction sessions: market price convergence
through rounds
Spot - high reduction sessions: market price convergence
through rounds
70.00
Market Price Differential
(observed - modelled)
50.00
session 1
50.00
session 1
30.00
session 2
40.00
session 2
20.00
session 3
30.00
10.00
Session 4
0.00
0
-10.00
1
2
3
4
5
6
7
8
9
10
session 3
20.00
Session 4
10.00
0.00
Round
-10.00
Round
0
1
2
3
4
5
6
7
8
9
10
-20.00
-20.00
-30.00
-30.00
-40.00
Future - low reduction sessions: market price convergence
through rounds
Future - high reduction sessions: market price convergence
through rounds
60.00
50.00
session 1
40.00
Market Price Differential
(observed - modelled)
60.00
40.00
30.00
20.00
session 1
40.00
session 2
session 3
30.00
session 3
session 4
10.00
20.00
session 4
10.00
0.00
-10.00 0
50.00
session 2
Round
1
2
3
4
5
6
7
8
9
10
Round
0.00
-10.00
-20.00
-20.00
-30.00
-30.00
0
1
2
3
4
5
6
7
8
9
10
Convergence of market quantities through rounds
Spot - Low reduction sessions: market quantity convergence
through rounds
Market quantitydifferential
(observed - modelled)
80
80
60
40
60
session 2
40
session 3
20
Session 4
session 2
Session 4
0
-20
session 1
session 1
session 3
20
Spot - high reduction sessions: market quantity
convergence through rounds
Round
0
1
2
3
4
5
6
7
8
9
10
0
0
-20
Round
1
2
3
4
5
6
7
8
9
10
-40
-40
Market quantity differential
(observed - modelled)
-60
Future - low reduction sessions: market price convergence
through rounds
100
80
session 1
60
session 2
40
session 3
20
session 3
0
1
2
3
4
5
6
7
8
9
10 Round
0
-40
-60
-40
-100
session 2
20
0
-20
-80
session 1
40
session 4
0
-20
Future - high reduction sessions: market quantity convergence
through rounds
60
-60
-80
session 4
1
2
3
4
5
6
7
8
9
10
Round
Spot and Future Quantities
Mean
Futures Market, Low
Futures Market, High
Quantity
Reduction
Reduction
Round
Spot Qty
7
9
10
7
8
9
10
11.68 10.83 12.35 10.84 10.94 10.82 11.85 8.36
Forward Qty 6.67
p-value
8
11.38 11.50 7.92
2.00
5.00
7.00
6.70
0.250 0.891 0.815 0.366 0.000 0.000 0.442 0.522
Interaction of emission reductions and
market form
Future volumes traded
Conclusions and recommendations
• The policy implications of these results.. Based on
the experimental data:
• If the authority is concerned with achieving an
emission target quickly, high rates of permit
reduction with spot markets should be considered.
• Higher rates of reduction did not result in greater
non-compliance.
• There should be high rates of compliance and limited
need for futures markets during the initial phase.
• If a low emissions trajectory is adopted then it could
be implemented with a futures market option.
• The findings of this work are based on
experimentation.
• Experimental economic techniques are the
glass houses of policy… Field trials are
required before the new variety is released…
• Further research is required to explore
operational and field specific implications.
•
Carbon Pollution Reduction Scheme
• Key elements:
– Reduce carbon pollution by 60 per cent of 2000 levels by 2050.
– Unconditional 5 per cent reduction in carbon pollution below 2000 levels by
2020. Up to 15% depending on global agreement.
– Use of market-based instruments
– Assistance for households and business
– Price cap
• The intention is to commence the scheme on
1 July 2010.
Framework
•
Coverage

Entities with direct emissions (stationary and transport) of 25 000 t co2-e per year or more.

Setting the cap



5 year caps with gateways (projections) to 10 years depending on international agreements
Differences between the scheme cap and the national target will be reconciled through the
allocation of notional credits to firms and industries not covered by the scheme.
Definition and allocation of permits
Vintage permits defined in tones of carbon emission
 Administrative Allocations
• Emissions-intensive trade exposed industries (EITE)
• Strongly affected industries
– Government auctions
– Unlimited banking (exception: those issued under the price cap)
– Short-term borrowing from following year (max 5%)

• Reporting and compliance


Compliance requires surrender of one permit for
each tonne of carbon dioxide equivalent emitted
Annual independent audit
 National Greenhouse and Energy Reporting Act
2007.
 National greenhouse and Energy Reporting
System - http://www.nger.com.au
Administrative allocation
– EITE scheme
• Emissions-intensive, trade exposed industries
• 90% for activities that has at least 2000 t co2-e per million dollars of
revenue.
• 60% for activities that have at least 1000 t co2-e per million dollars of
revenue.
• 4 year evaluation – 1 July 04 to 31 December 08.
– strongly affected industries
• Also includes strongly affected industries –coal fired electricity generation
1 July 04 to 30 June 07 >0.86 t co2-e/MWh. Due for review in 2013.
• Assistance will be in the form of funding for carbon capture, storage
technology and sustainable coal. It will be delivered through existing
schemes. (National Low Emissions Coal Initiative)
• Direct assistance in the form of administratively allocated permits
(approx. $3.9 billion)
– Objective – avoid ‘carbon leakage’ – companies moving overseas as a
result of carbon reduction requirements.
Government Auction
• Auction will be held 12 times through the financial year
• Future vintage auctions – four years of vintages will be
advanced auctioned (current vintage plus advance auctions of
three future vintages).
• Simultaneous ascending clock auctions
• Price cap in 2010-2015 – price cap of $40 - unlimited store of
additional permits at the fixed price.
• Effectively capping prices and imposing a static Pigovian tax
on any firm who can earn more than $40/Ct from production.
• All permits are tradeable except those issued under the price
cap scheme