Experimental Testbeds for New Applications of Environmental Trading Programs

EPA Grant Number: R833672
Title: Experimental Testbeds for New Applications of Environmental Trading Programs
Investigators: Stranlund, John , Cason, Timothy N. , Porter, David , Murphy, James , Spraggon, John , Rassenti, Stephen , Smith, Vernon
Institution: University of Massachusetts - Amherst , George Mason University , Purdue University
EPA Project Officer: Hahn, Intaek
Project Period: July 1, 2007 through June 30, 2010
Project Amount: $1,057,728
RFA: Market Mechanisms and Incentives: Case Studies and Experimental Testbeds for New Environmental Trading Programs (2006) RFA Text |  Recipients Lists
Research Category: Environmental Justice


This research uses experimental methods to design and test several elements of market mechanisms, and addresses all three of the primary research questions identified in the solicitation (characteristics of effective trading programs, factors that lead to their success, efficiency and environmental benefits from properly designed trading programs, and distributional concerns particularly hot spots). The design elements that will be addressed are: enforcement strategies for inter-temporal trading programs when monitoring is imperfect; a comprehensive trading scheme for multiple pollutants; intergovernmental (or interstate) emissions trading; emissions permit banking when firms face emissions uncertainty, and when regulators are concerned with temporal hot spots, i.e., unintended spikes in annual emissions due to permit banking.


This project consists of three independent, yet integrated, series of laboratory experiments at UMass, Purdue, and GMU. Each project focuses on unique aspects of market design and enforcement. The UMass investigators will focus on the design and testing of enforcement strategies for new markets in which monitoring is imperfect and rights are transferable across time. The investigator at Purdue University will focus on simultaneous multiple pollutant trading, intergovernmental vs. intersource trading, and alternative banking rules. The GMU team will delve deeper into the design of banking rules that limit unintended spikes in annual pollution by prioritizing banked permits. The investigators will meet frequently to develop collaborative efforts and peer-review research designs.

Expected Results:

The experiments for this research will generate a substantial body of data and analyses that will help policy-makers and researchers better understand how design details of trading programs will promote their success or lead to their failure. The experiments conducted at the UMass will provide a comprehensive body of knowledge about the cost-effective design of enforcement strategies for dynamic emissions trading programs when monitoring is imperfect. Thus, this research addresses the solicitation’s questions about the effectiveness of trading programs without sufficient emissions monitoring, how enforcement affects trading, and how rules that allow banking can improve market performance.

The Purdue experiments will test mechanisms designed to incorporate multiple pollutants into a comprehensive trading scheme; they will provide guidance about the transactions costs and enforcement benefits of requiring international emissions trades to be routed through governments rather than between individual sources, and they will identify effective ways to manage allowance banking when firms face emissions uncertainty. This project addresses the solicitation’s research questions regarding the impact of trading ratios on market activity, uncertainty regarding trading ratios, how trading works in the context of multiple pollutants, the impact of enforcement on trading, government entities’ role in increasing or decreasing transaction costs, how geographic scale affects trading, and the contexts and rules that allow banking to improve market performance.

The experiments conducted at GMU will deliver valuable information concerning the optimal design of an institution intended to reduce regulatory risk in administering an environment where consumers of publicly auctioned rights face complicated demand uncertainties due to inter-temporal risks. This research will get to the heart of the solicitation’s questions about banking and the temporal scale of trading, and will also address the distributional and equity considerations that are listed as a research priority.

Supplemental Keywords:

market mechanisms, experimental economics, public policy, air quality, global climate, water quality, enforcement, compliance, economics,

Progress and Final Reports:

  • 2008
  • 2009
  • Final