EPA's New Emissions Trading Mechanism: A Laboratory Evaluation

Abstract

The EPA has designed a new call auction institution for trading allowances to emit sulfur dioxide. This paper reports twelve laboratory markets that evaluate the performance of this new institution relative to the more commonly observed uniform price call auction. We find that the uniform price call auction (i) is more efficient, (ii) induces more truthful revelation of underlying values and costs, (iii) provides more accurate price information, and (iv) is more responsive to changes in underlying market conditions. Under the EPA auction rules both buyers and sellers misrepresent their true value of the emission permits, which biases market-clearing prices downward.

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