The independence of initial allocation in pollution markets

We will consider five treatments associated with the cap-and-trade trading scheme. In these treatments we vary the initial distribution of the pollution permits in systematic ways:
Treatment 1 (Equal distribution): In this treatment, all firms receive the same number of permits.

Treatment 2 (Emission-based grandfathering): In this treatment, permits are allocated in proportion to each firm's baseline emissions in the absence of pollution regulation.

Treatment 3 (Reversed emission-based grandfathering): In this treatment, permits are allocated in proportion to each firm's baseline emissions, but the shares are determined by the reverse ranking of firms' emissions relative to the total market emissions in the absence of pollution regulation.

Treatment 4 (Clean-firms exclusive): In this treatment, only cleaner firms receive permits, with each receiving an equal share of the total permits, while dirtier firms receive none.

Treatment 5 (Dirty-firms exclusive): In this treatment, only dirtier firms receive permits, with each receiving an equal share of the total permits, while cleaner firms receive none.

2025-08-25

2025-12-31

Permit price; coupon holdings; number of transactions; output; emissions; cost-effectiveness

distribution of emissions or abatement among polluters, and polluter profits

This study employs a laboratory experiment conducted in a standard university experimental economics lab, with participants recruited from a broader student population. Participants will be part of a single group of eight participants for the duration of the experiment.

This study builds on Friesen, MacKenzie, and Shen (2025), who implemented a related cap-and-trade experiment with a larger group size. In contract to the previous studies, which typically fix output and focus exclusively on permit trading, we allow for the impact of the output market by letting participants to make both output and permit trading decisions simultaneousely. This enables us to investigate how different allocation rules shape the interaction between product and permit markets.

The main experimental task in this study involves subjects making decisions about how many units of a fictitious good to produce. Each unit of product generates a fixed amount of revenue and emits an amount of pollution, which must be either covered by holding a pollution permit or by abating the emission at a cost. Participants will receive an initial endowment of free permits and can trade them through a double auction market. Participants' earnings will be proportional to the profits they make from production and trading permits. Participants will have different types varying in their production and abatement costs.

We consider five treatments associated with the cap-and-trade trading scheme. In these treatments we vary only the initial distribution of the pollution permits in systematic ways. Revenue and cost parameters are identical across the five treatments; the only difference lies in how the initial pollution permits are distributed, while the total number of allocated permits remain constant. In addition, the experiment elicits participants' risk preferences and standard demographic information, which will be used as control variables in regression specifications to account for individual heterogeneity in behaviour.

Participants will be recruited via email through the SONA system. They choose between a list of available sessions, and the session is randomized to a treatment before it is initialized.

Individual

Yes

30 groups of 8 subjects per group

240 subjects play the game repeatedly over 10 periods

48 subjects per treatment (five treatments total)

The sample size is based on a companion experiment comparing cap-and-trade and tradable performance standard treatments, in which 6 independent groups of 12 subjects each produced significant differences in permit prices. In the current experiment, although we vary the initial distribution of permits among subjects and each group has 8 subjects, all other experimental conditions are similar to the previous cap-and-trade treatment. Therefore, we expect that 6 independent groups per treatment will retain sufficient power to detect meaningful differences in permit prices, if any, due to variations in the initial permit allocations.