Baseline-and-credit emission trading mechanisms

The classic analysis assumes that the regulatory authority sets an aggregate cap on emissions from a set of sources and then divides the cap into a number of tradable permits (frequently called allowances), each of which authorizes the discharge of a unit quantity of emis- sions. [...] Baseline-and-credit plans are theoretically equivalent to a cap-and-trade plan if the cap implicit in the baseline-and-credit plan is fixed and numerically equal to the fixed cap in a cap-and-trade plan. [...] The investigation seeks to confirm the prediction that the outcome of the two approaches would be the same when the output subsidy inherent to the baseline-and-credit plan can not possibly lead to productive expansion. [...] Despite adding to the complexity of the experimental environment, the au- thors implement an explicit emission rate choice to allow them to distinguish between emission rate/technology choice errors and permit trading errors.4 The experimental environment created for the work presented in this paper is similar to that described in Ben-David et al. [...] The quantity of credits created in the current period is determined by the firm’s emission rate and its quantity of output sold, and so can only credited after output for the current period was determined.7 7As mentioned in the introduction, this lag in credit supply mimics the institutional framework found in most real-world baseline-and-credit systems.