Exclusionary manipulation of carbon permit markets: a laboratory test

Abstract

The experiment reported here tests the case of so-called exclusionary manipulation of emission permit markets, i.e., when a dominant firm -- here a monopolist -- increases its holding of permits in order to raise its rivals' costs and thereby gain more on a product market. Earlier studies have claimed that this type of market manipulation is likely to substantially reduce the social gains of permit trading and even result in negative gains. The experiment designed here parallels institutional and informat ional conditions likely to hold in real trade with carbon permits among electricity producers. Although the dominant firm withheld supply from the electricity market, the outcome seems to reject the theory of exclusionary manipulation. In later trading p eriods, closing prices on both markets, permit holdings and total electricity production are near competitive levels. Social gains of emissions trading are higher than in earlier studies.