Investment decisions and emissions reductions: Results from experiments in emissions trading

Over the past several decades, emissions trading has evolved from a suggestion by economists to a regulatory tool widely seen as highly successful (Farrell and Lave 2004). Examples include the well-established sulfur dioxide allowance trading program in the United States and the recent CO2 emission reduction credit program in Europe (Carlson et al. 2000; Boemare and Quirion 2002). Currently, emissions markets protect both human and ecosystem health, and in the process, result in billions of dollars changing hands. The application of emissions trading mechanisms will influence many decisions, including both operational (e.g., what fuel to purchase) and investment choices (e.g., when to purchase abatement technology). New patterns of investment may be among the most important outcomes of emissions trading programs. Investment in new technologies are needed to successfully deal with environmental challenges like global warming (Hoffert et al. 2002), and the incentives created by emissions trading programs can affect these decisions. This chapter uses an experimental economics approach to evaluate how individuals behave in emissions trading markets with opportunities for investment.