Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non- regulated companies

This paper examines the investment strategies of regulated companies in irreversible abatement technologies and the environmental achievements of the system in an inter-temporal cap–and–trade market using laboratory experiments. The experimental analysis is performed under varying market structures: firstly, in a market where there are exclusively regulated companies and then in a market with the inclusion of subjects not liable for compliance with environmental regulations. In line with theoretical models on irreversible abatement investment, the paper shows that regulated companies trade permits at a premium. At the same time, steep fixed per unit penalty for excess emissions effectively prompt investments in irreversible abatement technologies. Further, the paper shows that by contributing to the permit demand and supply, the non-regulated companies improve the compliance rate and facilitate the exchange of permits helping the system to achieve a zero-excess permit position.