Abstract
This paper reports a preliminary laboratory experiment in which traders make investments to increase the reliability of tradable instruments that represent greenhouse gas emissions allowances. In one half of the sessions these investments are unobservable, while in the other half traders can invite costless and accurate inspections that make reliability investments public. We implement a buyer liability rule, so that if emissions reductions are unreliable (i.e., sellers default), the buyer of the allowances cannot redeem them to cover emissions. We find that allowing inspections significantly increases the reliability investment rate and overall efficiency. Prices of uninspected allowances usually trade at a substantial discount due to the buyer liability rule, which provides a strong market incentive for sellers to invest in reliability.
Keywords
emissions permits, environment, experiments, Kyoto Protocol
Tech Report Number
2000-003
Date of this Version
1-1-2000
Recommended Citation
Cason, Timothy N., "Buyer Liability and Voluntary Inspections in International
Greenhouse Gas Emissions Trading: A Laboratory Study" (2000). Purdue CIBER Working Papers. Paper 3.
https://docs.lib.purdue.edu/ciberwp/3