Heterogeneity, Irreversible Production Choices, and Efficiency in Emission Permit Markets

This paper investigates a class of market mechanisms for environmental regulation based on the Clean Air Act tradable discharge permit program. Laboratory market experiments capture some of the more salient institutional features and focus on issues of firm technological heterogeneity and irreversible investment regarding the operation of the permit market. Experimental results suggest that higher degrees of abatement cost heterogeneity may lead to reduced trade volume, while the implications of increased cost heterogeneity regarding price volatility are mixed. Finally, increased cost heterogeneity appears to result in decreased “laboratory efficiency.”