1. ESA Roma 2007 CO 2 TAXES AND TRADABLE QUOTAS, EXPERIMENTAL EVIDENCE OF BIASED DECISIONS Carla Susana Assuad Erling Moxnes System Dynamics Group University of Bergen, Norway

2. ESA Roma 2007 Problem Kyoto targets for GHG emissions in 2012 –Domestic reductions? –Quota trade? Democratic decisions –misperceptions? –Domestic: Tax policy – too late? –Quota trade: Also cost increasing?

3. ESA Roma 2007 Laboratory Experiment Objective: Reach national Kyoto target with minimal costs –from 4000 to 3000 Mt/y Time horizon: 2000 to 2012 Task –T1: Set CO 2 taxes every year, no trade of quotas –T2: Set CO 2 taxes and trade quotas every year (symmetric 5 player game)

4. ESA Roma 2007 Underlying model Dynamics - Lecocq et al (1998) –Replacements (20 year lifetime, wide distr.) –Retrofits (3 year delay, more costly) No economic growth No technological improvement Punishment: 200 $/ton in 2012 Cost curve Info. v

5. ESA Roma 2007 Information Marginal cost curve:

6. ESA Roma 2007 Interface T1

7. ESA Roma 2007 Interface T2

8. ESA Roma 2007 Benchmarks

9. ESA Roma 2007 Feedback strategy Complex dynamic optimisation problem with lack of precise information With a proper mental model including delays, a simple and efficient feedback strategy exists

10. ESA Roma 2007 Data 30 economics students in Norway 38 economics students in Colombia –after 1 outlier removed (market with 5 subjects) Data are pooled

11. ESA Roma 2007 T1: Only tax policy

12. ESA Roma 2007 T2: Tax with trade option

13. ESA Roma 2007 T2: Quota price

14. ESA Roma 2007 T2: Price minus tax

15. ESA Roma 2007 Emissions in 2012 Compared to target of 3000 Mt/y

16. ESA Roma 2007 Quotas vs. dom.reductions ( 2012)

17. ESA Roma 2007 Costs Compared to benchmark costs of 44674 M$

18. ESA Roma 2007 Conclusions Excess costs in T1 –Misperception of delays –Tax aversion –Field data (quota price minus tax) Excess costs in T2 –quota trade stimulates tax differences –different taxes motivate quota trade –all trade does not signal efficiency improvement –profit potential for quota sellers –lack of arbitrage

19. ESA Roma 2007 Thanks