Discussion Paper No. 557

TWO PATTERNS OF PRICE DYNAMICSWERE OBSERVED IN GREENHOUSEGASES EMISSIONS TRADING EXPERIMENTS:
AN APPLICATION OF POINT EQUILIBRIUM

Yoichi Hizen
Takao Kusakawa
Hidenori Niizawa
andTatsuyoshi Saijo

October 2001

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Two Patterns of Price Dynamics were Observed in Greenhouse
Gases Emissions Trading Experiments:
An Application of Point Equilibrium#

Yoichi Hizen*1
Takao Kusakawa*2, *3, *6, *7
Hidenori Niizawa*4, *5, *6, *8
and
Tatsuyoshi Saijo*3, *5, *6, *7, *8
May 2001# This research was partially supported by CREST (Core Research for Evolutional Science andTechnology) of the Japan Science and Technology Corporation (JST), GISPRI (Global Industrial
and Social Progress Research Institute), Grant in Aid for Research 11430002 of the Ministry of
Education, Science and Culture in Japan, the Asahi Glass Foundation, the Nissan Foundationand the Sumitomo Foundation. We also thank Dr. Yasuko Kawashima of the National Institutefor Environmental Studies in Japan for providing marginal abatement cost information.
*1 Graduate School of Economics, University of Pennsylvania, Philadelphia, PA 19104-6297, USA*2 Graduate School of Economics, Osaka University, Toyonaka, Osaka 560-0043, Japan*3 Institute of Social and Economic Research, Osaka University, Ibaraki, Osaka 567-0047, Japan*4 Institute of Economic Research, Kobe University of Commerce, Kobe, Japan*5 CREST, Japan Science and Technology Corporation, 3-12-40 Hiroo, Shibuya, Tokyo 150-0012, Japan*6 GISPRI, 2-1-1 Toranomon, Minato, Tokyo 105-0001, Japan*7 Research Institute of Economy, Trade and Industry, 1-3-1 Kasumigaseki, Chiyoda, Tokyo 100-8901,
Japan*8 Climate Design, Institute of Social and Economic Research, Osaka University, Ibaraki, Osaka 567-0047,
Japan

ABSTRACTThis paper compares efficiencies of double auction and bilateral trading in GHG
emission trading experiments with the addition of two rules, abatement irreversibility of
GHG emissions and non-compliance penalty, to Hizen and Saijo (1998). Using a newconcept of equilibrium, we found that (i) Results were grouped into two cases. In one case,
excessive reductions occurred at the early stage of the experiment and efficiency was
relatively low. In the other case, excessive reduction did not occur at the early stage ofexperiment and efficiency was relatively high. (ii) In both cases, efficiency of double
auction was higher than that of bilateral trading. (iii) Emissions trading lowered emissions
reduction costs. (iv) Excessive emissions reduction occurred in almost all the sessions.

Correspondent:
Tatsuyoshi Saijo
Institute of Social and Economic Research
Osaka University
Ibaraki, Osaka 567-0047
Japan
Phone 01181-6 (country & area codes)
6879-8582 (office)/6878-2766 (fax)E-mail: saijo@iser.osaka-u.ac.jp

1. Introduction
The third Conference of Parties (COP3) to the United Nations Framework
Convention on Climate Change was held in Kyoto in December 1997, and adopted the
Kyoto Protocol.1 The Protocol establishes national emission targets for greenhouse gases(GHGs) for developed countries including economies in transition. In effect the Protocolcalls for an emissions reduction of 5.2% from 1990 levels for developed countries as awhole, with for example Japan to attain 94% of 1990 emissions, USA 93%, EU 92%, Russia
100%, during the period 2008 and 2012. In order to achieve this goal, the use of Kyoto
mechanisms, which include international emissions trading, joint implementation, and the
Clean Development Mechanism, was authorized. At the COP6 held in Den Hague inNovember 2000, the parties reviewed the details of the Kyoto Protocol in preparation for its
ratification, but the conference failed to agree on the details of the Kyoto mechanisms.2
Whatever the final outcomes of the negotiation process may be, design of the mechanisms
is important from an economics viewpoint.
This paper focuses on emissions trading in Kyoto mechanisms. The purpose ofthis paper is to explore, by employing an experimental method, what type of institutions
can efficiently attain the targets of the Kyoto Protocol related to GHG emissions reduction.
Bohm (1997), an initiator of GHG emissions trading experiments, reported a bilateral
trading experiment among four Nordic countries, using experienced public officials or
experts appointed by the Energy Ministries. The resulting prices were very close to thecompetitive equilibrium price with an efficiency of allocation of 97%, which is extremely
high. Muller and Mestelman (1998) and Godby, Mestelman and Muller (1998) provide
many new findings on general emissions trading experiments. Among others, experimental
economists have found that: (i) allowing banking permits over time smooths contracted
prices across time periods, and (ii) a trader who has some market power other than in theemissions trading market can influence the emissions trading market, and hence theintroduction of the emissions market reduces the efficiency of the whole economy.3
Our experimental design focuses on three important features that have not been
analyzed so far in previous experiments. These are the effects of non-compliance penalty,
abatement irreversibility and the time lag effect of investment.
1 See http://www.unfccc.de/index.html
2 President Bush announced that the USA would not ratify the Kyoto Protocol in March 2001.
3 The experiments by Bohm and Carlén (1999) show that the market power problem is not as serious as

Muller and Mestelman (1998) and Godby, Mestelman and Muller (1998) suggest since participants in anemissions trading market can buy and sell the permits.

1

For non-compliance penalties, when a party cannot attain the Kyoto target an
important issue in the negotiation process of the design of the Kyoto Protocol has been
what type of penalty would be appropriate.4 In our experimental design, we impose amonetary penalty when a party is under non-compliance. When a party ends with noncompliance, it has to pay a penalty which is about three times higher than the competitive
equilibrium price, but when a country ends with over-compliance, the permits left overhave no value.
With abatement irreversibility, once a party invests a certain amount forabatement, it cannot revert to the original situation. This is shown by movement on themarginal abatement cost (MAC) curve. When a party moves from a certain point on the
MAC curve to another point through abatement investment, it cannot return to the original
point. In other words, the shape of the MAC curve is changed by the investment decision.
For the time lag effect of investment, even though a party decides on abatement
investment at a given point, the actual abatement will be done later. In order to takeaccount of this effect, a party in our experiment can only decide on abatement investment
within the first half part of the period. Abatement investment decisions cannot be madeafter the half point of the period.
We have two types of experimental controls. The first one is the trading method,which is either bilateral trading or double auction. The second control is the disclosure ofcontract information (i.e., price, quantity, and who are the buyer and the seller). Therefore,
there are four treatments: bilateral trading with open information, bilateral trading withclosed information, double auction with open information, and double auction with closed
information. However, since all proposals in double auction are open to the public, we
actually have three treatments. Each treatment has four sessions and hence we have twelve
sessions in our experiment.
Although the Hizen and Saijo (2001) experiment uses the same MAC curves, theexperimental designs are different. Hizen and Saijo designed their experiment so thatfirstly, non-compliance and over-compliance would not occur in order to exclude theireffect; secondly, so that subjects could move on the MAC curves freely; and thirdly, so that
subjects could make abatement investment decisions throughout the period. Under thisdesign, they observed the following: (i) the efficiency of both bilateral trading and double
4 Japan insists that the target of a party is just a challenge and hence no penalty should be imposed when it

cannot attain it. However, most of the countries including the US, the EU and developing countries
oppose the idea and advocate strong penalty including monetary punishment.

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auction is quite high, regardless of the control of contract information5; (ii) marginal
abatement costs are equalized over time in both institutions; (iii) contracted prices roughly
converge to the competitive price over time in a double auction, but not quite so in bilateral
trading.
However, in our experiment we found results that were different from those ofHizen and Saijo and others. First, two patterns of price dynamics were observed with thehelp of a new equilibrium concept called a point equilibrium. At each point of time in asession, the normative equilibrium price depends on the previous decisions of abatement
investment. For example, assuming that at a certain point in time a party conducts
excessive abatement investment more than that of competitive equilibrium, after otherparties have already conducted investments at exactly competitive equilibrium, the total
amount of reductions would then exceed the competitive equilibrium reductions, andhence the competitive equilibrium price at this point should be less than the competitive
equilibrium price before conducting a session. Therefore, we have two sequences of pricedynamics. One is actual data and the other is “should be” price pattern derived from theactual price data. This “should be” price at each point of time is named the point
equilibrium price.
In one of the two patterns, the point equilibrium price dropped at an early stage ofthe transactions.6 Due to fear of non-compliance, some subjects conducted excessive
domestic reductions at an early stage which caused excess supply of emissions permits,and hence the point equilibrium price went down. Five sessions fall into this pattern. The
efficiency of this pattern was relatively low. In the other pattern, that is seven sessions outof twelve, excessive reductions did not occur at an early stage and the point equilibrium
price pattern was very close to the competitive equilibrium. Its efficiency was relatively
high, but substantially lower than that of Hizen and Saijo.
Secondly, we observed that efficiencies of double auction were higher than thoseof bilateral trading in each price pattern. That is, the treatment of transaction methods did
not give us a clear-cut distinction on efficiency, but the two patterns did. On the other
hand, no clear distinction on efficiency was observed between bilateral trading and double
auction in Hizen and Saijo.
5 The efficiencies of emissions trading are high. They are between 91.9% and 99.9% for bilateral trading

and between 99.4% and 99.7% for double auction.
6 Baron (2000) observed the same price dynamics in his experiment.

Since he conducted just one session
only, it is hard to generalize the result. However, the price pattern of sulfur dioxicde market in the U.S.
showed the same price dynamics around the beginning of the first few years.

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Third, although efficiencies of sessions were not very high, in eleven sessions outof twelve the emissions reduction costs of emissions trading were lower than those ofdomestic reductions only.
Fourth, excessive emissions reduction occurred in almost all the sessions
regardless of the treatment. Out of 48 subjects in bilateral trading 8 subjects were under
over-compliance and 3 subjects were under non-compliance. Out of 24 subjects in double
auction 5 were under over-compliance and none was under non-compliance. The
remaining subjects complied with the targets exactly.
This paper is organized as follows. In Section 2, the experimental design andprocedures are described. The point equilibrium is explained in Section 3. Section 4 shows
two types of efficiency. In Section 5, we analyze the results using the point equilibrium. The
final section contains concluding remarks and policy implications.
2. Experimental Design
We recruited at least six students for each session through campus-wide
advertisements at Osaka University. These students were told that there would be an
opportunity to earn money in a research experiment. Two or three days after recruitment,
we conducted the sessions. In the recruitment and experiment, we did not use the term
"emissions trading".
In each session, subjects were seated at desks in a relatively large room andlistened to a tape-recorded voice giving instructions. In this part, each subject received asample graph, which was actually an MAC curve. See Figure 1. The horizontal axis
represents the amount of an abstract commodity and the vertical axis represents themarginal cost. Each subject was told that she would start from the initial position (20 units
in the figure) and should finish with more than or equal to the goal (70 units in the figure).
"Your initial position" is her initial emissions and "your goal" her target of the Kyoto
Protocol. When she moves one unit to the right (left) along the curve from the initial
position, she obtains (loses) one unit of goods in exchange for paying (getting) 100 units ofmoney. In our experiment, we called one unit of reduction of emissions "producing theunit" and one unit of increment of emissions "returning the unit to an experimenter." In thispaper we use the terms emissions or reductions rather than the terms that were used in our
sessions.
Abatement irreversibility was then explained to subjects. See Figure 2-1. The

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horizontal axis represents the amount of emissions and the vertical axis represents
marginal abatement cost. The downward sloping curve is an MAC curve. Point a
corresponds to the initial position of the party. If the party decides to invest in emission
reductions and moves from a to b on the MAC curve, the shaded area is the abatement costof moving from a to b and the position moves from the initial position to the new position
given in Figure 2-2. The MAC curve is considered as representing marginal cost when aparty reduces one unit of emissions, but it can be regarded as representing marginal benefit
when it increases one unit of emissions. If abatement investment is reversible, the benefit of
one more unit of emissions is the height of point b. That is, the abatement investment isfully recoverable by increasing the emissions. If it is totally unrecoverable, the benefit ofemitting one more unit should be zero. In our experiment, we take a middle point of these
two extremes. After any amount of emission reduction investment, the benefit of emitting
one additional unit is always the height of the initial position. Further benefit of emissions
decreases along the right hand side of point a of the MAC curve in Figure 2-1. Therefore,
the new MAC curve after moving to the new position becomes the curve depicted in Figure2-2. That is, the shape of the MAC curve changes after abatement investment. On the other
hand, it would not change shape in the case of abatement reversibility.
After instruction on abatement irreversibility, we taught subjects basic strategies
depending on price level. See Figure 3 for an example. Figure 3 gives the case where the
Kyoto target is on the left hand side of the initial position. Assume that the price level is at
p. Since the price of permits is high, the party should reduce her emissions until MAC isequalized to the price, that is, from a to b, and then sell the difference between the Kyoto
target and the new position, that is, from b to c. Two other cases such as p’ and p” wereexplained to subjects. Several more cases were shown to subjects with the target on theright hand side of the initial position.
A marginal abatement cost curve can be regarded as an excess demand curve foremissions permits in the following manner. See Figure 3. If the Kyoto target is the new
origin, then the left hand side of the MAC curve becomes the supply curve of the permits
and the right hand side becomes the demand curve. That is, the party becomes a supplierof permits when the price level is high enough, and it becomes a demander of permits
when it is low enough. Thus the MAC curve is an excess demand curve for permits when
the Kyoto target point is the origin.7

7 See Saijo (2000) for a theoretical analysis.

5After instruction on basic strategies, all subjects took an examination to check theirunderstanding of the instructions. The best six subjects continued the session, and the restof the subjects were asked to leave the room with $13.16 ($1=114 yen). Each subject wasthen assigned a subject number from 1 to 6 and received her own marginal abatement cost
curve. They were given fifteen minutes to strategize before the sixty minutes' trading
period started.
The six subjects played the roles of Russia, Ukraine, USA, Poland, EU, and Japan.
Figure 4 shows the MAC curve of each party. In the figure, their MACs are shifted so that
their Kyoto targets are the origin, that is, each curve is an excess demand curve foremissions permits of the party, and the dot on the curve shows its initial position. During
the experiment, we did not use any country names. Because we did not use any terms
related to emissions trading, subjects faced a situation where trading and production of an
abstract commodity were conducted with an abstract price or at an abstract production
cost.
We have three types of treatments in our experiment: bilateral trading treatment
with contract information (price, quantity, and subjects' numbers) closed, bilateral trading
treatment with contract information open, and double auction treatment with contract
information open. In double auction, all proposals are open by nature, so we did not have adouble auction treatment with contract information closed. Since we conducted four
sessions in each treatment, we had twelve sessions. In what follows, "Bc" represents thebilateral trading treatment with contract information closed, "Bo" the bilateral trading
treatment with contract information open, and "D" the double auction treatment For
example, "Bo3" indicates session 3 of the bilateral trading experiment with contract
information open.
In bilateral trading, each subject could move around the room freely to find a
subject with whom to transact. During negotiations, subjects were not allowed to talk. Only
numbers (price and quantity), and "yes" and "no" symbols on their negotiation sheets, were
exchanged, in order to avoid information leakage. Once a pair reached agreement, theyreported the price, quantity, and their subject numbers to an experimenter. In Bo sessions,the experimenter announced this information and wrote it on a black board.
In our double auction, an auctioneer called on the subject who raised her hand theearliest. Then the subject provided her subject number, sell or buy decision, the quantity
and the price per unit. For example, a subject said, "Subject five wants to sell ten units at6

one hundred dollars per unit." The auctioneer projected the proposal on an OHP screen.
After the proposal, the subject who raised her hand the earliest could trade with theproposer. The accepted quantity had to be smaller than or equal to the proposed quantity.
We imposed the "improvement rule" on proposals, that is, asks (bids) must be successively
lower (higher).8
To reduce or increase emissions, a subject informed the experimenter of theamount of emissions reductions or additional emissions. These could be conducted only inthe first half of the sixty minute trading period.9 That is, after half an hour, the point on the
MAC curve is fixed for the rest of the period. If a subject ended the experiment under noncompliance, she had to pay a penalty of 300 per over-emissions unit. On the other hand, if asubject ended it with over-compliance, the permits left over had no value.
It took approximately three hours for each session. The mean payoff per subject
was $34.61. The maximum payoff was $66.34, and the minimum payoff was $17.54.
3. Point Equilibrium
Due to changes of MAC curves caused by abatement investment irreversibility
described in Section 2, the normative competitive equilibrium price also changes. See
Figure 5. This figure is similar to Figure 2, but the position of the Kyoto target is explicitly
expressed. That is, the downward sloping curve is regarded as a demand curve foremissions permits. On the other hand, the supply curve is derived from the MAC curves ofother parties. This is an upward sloping curve in the figure. The competitive equilibrium
before any abatement investment is e and the competitive equilibrium price is p*. If ademander conducts abatement investment and moves from point a to point b, after thisinvestment the normative competitive equilibrium would no longer be at e, but should be e’and the new competitive equilibrium price becomes p’. At each point of time, thenormative competitive equilibrium changes as abatement investments proceed. We
describe the normative competitive equilibrium given previous actions of subjects at a
certain time as the point equilibrium at the time.
If it were also the case with abatement reversibility, the competitive equilibrium
price and the point equilibrium price would always coincide with each other throughout
the period. On the other hand, since the shapes of MAC curves change as time proceeds in
8 See p. 41 of Davis and Holt (1993).
9 Each session has just one period that is sixty minutes.

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our experiment, they do not always coincide with each other although they do at thestarting point. Therefore, there are three price sequences in a session. The first is a sequenceof real price data. The second is the normative competitive equilibrium price sequencewhich is constant throughout the period. The third is the point equilibrium price sequence.
The first and second sequences are usually compared in the analysis of experimental
economics literature. We will show in section 5 that the introduction of the point
equilibrium price sequence enriches our analysis of price dynamics.
4. Two Definitions of Efficiency
We define efficiency as follows:
The sum of surplus extracted in the experiment________________________________________________________The sum of surplus extracted at competitive equilibrium
This is a standard measure of efficiency. Efficiency in experiments is usually measured as
the percentage of the realized sum of surplus to the maximum possible sum of surplus
extracted from an institution. The maximum is attained at the competitive equilibrium andthe sum of surplus extracted at the competitive equilibrium is 6990. We employ two typesof efficiency measures depending on how we measure "the sum of surplus extracted in theexperiment."
The first one is to measure "the sum" as the sum of the actual payoffs obtained
during the experiment. When a subject ended with over-compliance, the permits left overhave no value, and when a subject ends with non-compliance, she must pay a penalty.
There are two problems with the above measure of efficiency. First, the permits
left over under over-compliance will have some value since the Kyoto protocol allows
banking of permits and over-compliance really means a reduction of GHGs beyond thetargets of the Kyoto protocol. Therefore, it would be natural to assign the left-over permits
some value. Second, the penalty from non-compliance would be handed to an international
body and would then be distributed to some parties. Therefore, the total sum of penalty
would not be a source of loss of efficiency.
Taking into account the above two facts, we modify efficiency in the following
manner. In the case when some subjects are under over-compliance and nobody is under
non-compliance we take the subject who has the highest marginal emission benefit and re-8evaluate one unit of over-compliance with this value. That is, hypothetically, a subject withthe highest marginal emission benefit can obtain benefit by using one unit of overcompliance. Next we take the subject who has the second highest marginal emission benefit
and do the same as above until reaching the last unit of over-compliance. We note howeverthat the shape of the marginal abatement cost curve (or the marginal emission benefit
curve) of each subject will have been changed due to abatement irreversibility at the end of
a session. Re-evaluation should therefore be carried out with this reshaped marginalemission benefit curve.
In the case when some subjects are under non-compliance, and nobody is under
over-compliance we take the subject who has the lowest marginal abatement cost, andreplace one unit of non-compliance with this value. That is, hypothetically, a subject withthe lowest marginal abatement cost can reduce one unit of emission instead of paying one
unit of penalty of another subject. We then take the subject who has the second lowest
marginal abatement cost, and repeat the above procedure until reaching the last unit of
non-compliance.10
Figure 6 shows an example when at the end of a session subject A was under
over-compliance and subject B complied with the target exactly. Both marginal abatement
cost curves have kinks at the end positions of the session due to abatement irreversibility.
The amount of over-compliance for subject A is 0-m, and the end position of subject B isexactly at the Kyoto target. The subject who has the highest marginal emission benefit issubject B. That is, the height of i is bigger than the height of k. Hence, the benefit fromemitting from i to n is the area 0-q-n-i. At n, the marginal benefit of subject B becomesexactly the same as that of subject A at k. From this point, the benefit can be obtained fromboth subjects A and B, and it is the area q-m-k-j-n. In total, the over-compliance of 0-m
generates the benefit depicted by the area 0-m-k-j-i.
The re-evaluation of over-compliance in Figure 6 can be interpreted as ahypothetical trade after the end of the session. Immediately after the session Subject A
emits the amount m-l and hence obtains the benefit l-m-k-j. Subject A then sells the amount0-l to subject B at the price p. Subject A then obtains the benefit 0-l-j-p, and subject B obtains
the net benefit p-j-i. In total, the sum of the surplus is exactly the same as the area 0-m-k-j-i.
5. Results
10 We did not have a session where both a subject with over-compliance and a subject with non-9

5.1 Analyses Using Efficiency TableIn this section we analyze experimental results using Table 1, efficiency table,
which provides a summary of the sessions.
The first row in the table shows the two treatments, i.e., bilateral trading anddouble auction. The second row indicates the names of the sessions. For each subject, in thefirst cell of the first column, the top left number represents the subject number and thenumber in the parentheses is the maximum possible surplus, or profit, that the subject canobtain if every subject trades permits at the price 119 which is the midpoint of thecompetitive equilibrium prices 118-120. The middle shows the name of the subject. The
number in the first parentheses of the bottom is the corresponding initial position in Figure
4. The first number in the second parentheses of the bottom is the position in Figure 4
where it should reduce its emissions at the price 119. The second number is the amount of
non-compliance. If the subject follows the transaction at the competitive equilibrium, thisshould be 0. For example, Russia, whose subject number is 1, can make the maximum
surplus 2555 at the price 119 when she reduces her emissions from her initial position -32 to
the point -55, and sells her permits until the amount of non-compliance becomes 0. Fromthe second column, for each subject the top shows the surplus a subject achieved, themiddle shows the ratio of the surplus she achieved to the surplus she extracts at thecompetitive equilibrium, the first number in the bottom shows the final position in Figure
4, and the second number at the bottom shows the amount of non-compliance at the end of
the session. In the case of over-compliance, this number is negative. In session Bc3, forexample, Russia achieved surplus of 620, the ratio of this surplus to the surplus she extracts
at the competitive equilibrium is 620/2555 = 0.243, she reduced emissions to the point -65,
that is, 10 units of over-reduction, and the amount of non-compliance was -22, that is, 22units of over-compliance. In order to show over-compliance, we put a bold square aroundthe cell. On the other hand, if a subject is under-compliance, we put a bold square withgray shading in the cell. The second row from the bottom indicates the sum of the surplus
each subject extracted and the efficiency of the session. The bottom row indicates the sumof the surplus after modification shown in section 4 and the modified efficiency of thesession. In session Bc1, for example, the sum of the surplus is 5112 and the efficiency is
5112/6990 = 0.731 where 6990 is the sum of the surplus at the competitive equilibrium. The
surplus after modification is 5612 and the modified efficiency is 5612/6990 = 0.803.

compliance co-existed.

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Using the table, we demonstrate that on average the market achieves positive
efficiency and positive modified efficiency, that is, on average the emissions trading
reduces the total costs of the Kyoto target at the market level compared with the case ofdomestic reductions only. At the subject level, almost all subjects extract positive surplus
from the market on average, that is, they reduce the costs of the Kyoto target on average.
Result 1. (i) On average efficiency and modified efficiency achieved in the market are positive.
(ii) On average each subject except the USA extracts a positive surplus from the market.
Support. (i) Efficiency was positive in eleven out of twelve sessions and the modified
efficiency was positive in all sessions. Both the mean of efficiency and the mean of themodified efficiency are statistically larger than 0 at the 1% significant level11.
(ii) Among twelve sessions, Ukraine and the USA achieved a positive surplus in ninesessions, the EU in ten sessions, Japan in eleven sessions, and Russia and Poland in all
sessions. The mean of the surplus each subject except the USA extracts is statistically larger
than zero at the 5% significant level. The USA extracted a negative surplus only in three
sessions, but the average of twelve sessions was negative, which is not statistically different
from zero. █Next we make comparisons between the efficiency of bilateral trading and that of
double auction, between the modified efficiency of bilateral trading and that of double
auction, between the efficiency of bilateral trading with closed information and that ofbilateral trading with open information, and between the modified efficiency of bilateral
trading with closed information and that of bilateral trading with open information.
Result 2. (i) A difference between the efficiency of bilateral trading and that of double auction was
not observed.
(ii) A difference between the modified efficiency of bilateral trading and that of double auction was
not observed.
(iii) A difference between the efficiency of bilateral trading with contract information closed and thatof bilateral trading with contract information open was not observed.
(iv) A difference between the modified efficiency of bilateral trading with contract information closed

11 Unless otherwise indicated, t-tests are used in this paper.

11and that of bilateral trading with contract information open was not observed.
Support. (i) The difference between the mean of the efficiency of bilateral trading and that of
double auction is statistically insignificant.
(ii) The difference between the mean of the modified efficiency of bilateral trading and thatof double auction is statistically insignificant.
(iii) The difference between the mean of the efficiency of bilateral trading with contract
information closed and that of bilateral trading with contract information open is
statistically insignificant.
(iv) The difference between the mean of the modified efficiency of bilateral trading with
contract information closed and that of bilateral trading with contract information open is
statistically insignificant. █As shown in Result 2 (ii), when we analyze all sessions together the difference
between the modified efficiencies of the trading institutions is not observed. However,when we classify the sessions into two groups according to their dynamic processes, suchas the path of point equilibrium price, a difference between the modified efficiency of
double auction and that of bilateral trading is observed.12 In the following section, weclassify the sessions into two groups and characterize each group.
5.2 Classification of the Sessions by their Dynamic Processes
Since Table 1 does not give us the dynamic processes of transactions, emissions
reductions, and additional emissions as time passes, we use figures where these dynamic
processes are illustrated with the point equilibrium price path. As an example, see Figure 7,
the figure of session Bc1. In this figure, the horizontal axis represents minutes and thevertical axis represents MAC and price. Squares in the figure show transactions. The lefthand (right-hand) side letter of a square represents the initial letter of the seller (the buyer)
and the number under the square the quantity traded. Lozenges (triangles) show theemissions reduction (additional emissions). The letter attached to a lozenge (triangle)
represents the initial letter of the subject who conducted emissions reduction (additionalemissions) and the number under the lozenge (triangle) the amount of emissions reduction(additional emissions). The gray (or green) horizontal line shows the competitive

12 As for the effect of price disclosure, no significant effects were observed even after the classification.

12

equilibrium price ranging from 118 to 120. The black (or dark red) line represents the point
equilibrium price path up to 30 minutes. It has some thickness until 14 minutes, thenbecomes 120 until just before 30 minutes, and then drops to 85. The dotted line is the point
equilibrium price path after 30 minutes, which is zero if over-compliance occurs, 300 if noncompliance occurs, and 0-300 if complied exactly. Figures of all sessions are given in
Appendix 1.
From these figures we notice that the pattern of the point equilibrium path up to
30 minutes varies considerably from session to session: in some sessions it drops early andin others it is almost the same as the competitive equilibrium price. That is, the pattern ofthe point equilibrium path characterizes the sessions. As a measure of these path patterns
we introduce the concept of discrepancy area, which is the area of the region enclosed by the
midpoint of the competitive equilibrium price up to 30 minutes, i.e. 119, and the sequenceof the midpoints of the point equilibrium prices up to 30 minutes. This area becomes larger
the earlier the discrepancy between the competitive equilibrium price and point
equilibrium prices happens and/or the larger this discrepancy is. An example is given in
Figure 8. The discrepancy area in this session is the area which is shaded. In this session,
the point equilibrium price dropped early and the degree of the drop was large, so that thediscrepancy area is large. See Figure 7 again. In session Bc1, on the other hand, thediscrepancy between the competitive equilibrium price and the point equilibrium prices
happened just before 30 minutes, so that the discrepancy area is almost zero.
Using this new concept and the dynamic processes of transactions and emissions
reductions, we obtain the following result.
Result 3. The sessions are grouped into two, that is, sessions Bc3, Bo1, D2, D3 and D4, andsessions Bc1, Bc2, Bc4, Bo2, Bo3, Bo4 and D1.
Support. When we use cluster analysis after normalizing the discrepancy area and themodified efficiency, first, the twelve sessions are divided into two groups, i.e., session Bo1
and the other eleven sessions, and second, the eleven sessions are divided into two groups,
i.e., sessions Bc3, D2, D3 and D4, and the remainder. That is, cluster analysis divides the 12
sessions into three groups: the largest group consists of sessions Bc1, Bc2, Bc4, Bo2, Bo3,
Bo4, and D1, the second largest group consists of sessions Bc3, D2, D3 and D4, and thesmallest group consists of session Bo1.
Next, we describe each group's dynamic characteristics. First, we examine the13largest group, i.e., sessions Bc1, Bc2, Bc4, Bo2, Bo3, Bo4 and D1. Consider session Bc1 as an
example of the group and see Figure 7 again. In this session, low contracted prices at theearly stage caused insufficient emissions reduction for suppliers such as Russia, Ukraine
and Poland. Therefore, just before 30 minutes the USA and EU, who could not buy enoughpermits, reduced their emissions to levels where their MACs exceeded the point
equilibrium price 120. These excessive reductions caused the point equilibrium price todrop to 90. This type of dynamic process also applies to the other sessions that belong tothis group. That is, relatively low contracted prices at the early stage caused insufficientemissions reduction of suppliers and in many cases, demanders conducted excessive
reductions just before 30 minutes in order to avoid a non-compliance penalty. Although
this caused efficiency losses the losses were not big. We name this group the constant point
equilibrium price case, the constant price case for short.
We now examine the second largest group, i.e., sessions Bc3, D2, D3 and D4.
Consider session D2 as an example of the group and see Figure 8 again. In this session
because of the relatively high contracted prices around the first 10 minutes, Japan andRussia conducted excessive reduction at around 10 minutes. Although this caused thepoint equilibrium price to drop, the contracted prices did not drop immediately due toinertia of contracted prices. Accordingly, Ukraine and the USA continued to reduce theiremissions at around 15 minutes at the MACs based on the former contracted prices, so thatthe point equilibrium price dropped even further. This type of dynamic process also
applies to the other sessions that belong to this group. That is, high contracted prices
and/or expectation of high contracted prices in the future at the early stage caused somesubjects to reduce their emissions to levels where their MACs exceeded the competitive
equilibrium price. Accordingly, the point equilibrium price immediately decreased, but
contracted prices did not drop immediately due to inertia. Therefore some subjects
continued to reduce their emissions to levels where their MACs exceeded the new point
equilibrium price, not knowing that the point equilibrium price had decreased. These
excessive reductions caused the point equilibrium price to decrease even further. This cycle
caused great efficiency losses. 13
In the third and smallest group, session Bo1, the USA reduced her emissions atextremely high MACs at the early stage and as a result the point equilibrium price dropped
heavily. However the contracted prices remained at about the same level as the contracted

13 A similar pattern of price sequence is observed in Baron (2000).

14

prices at the early stage because of inertia of the contracted prices and as a result subjects
continued to conduct excessive reductions. These dynamic processes are the same as thoseof the second largest group, so that we combine these two groups into one and name it theearly point equilibrium price decrease case, the early price decrease case for short.
As a result, the total sessions are divided into two by cluster analysis using two
variables, i.e., modified efficiency and discrepancy area, and by reclassification according
to the dynamic processes of transactions and emissions reduction. █Figure 9 shows a scatter diagram of 12 sessions where the horizontal axis
represents modified efficiency and the vertical axis represents the discrepancy area. The
number above the session name is modified efficiency and the number below the name ofthe session is efficiency. Where the two efficiencies are the same, only the modified
efficiency is included. The figure shows that the sessions which belong to the constant pricecase are densely located around the southeast corner and the sessions that belong to theearly price decrease case are further away from the corner. This visual impression
confirms the cluster analysis described above.
The characteristics of each of the two groups are described below.
Result 4. (i) In sessions Bc1, Bc2, Bc4, Bo2, Bo3, Bo4 and D1 (the constant point equilibrium pricecase), relatively low contracted prices at the early stage caused insufficient emissions reduction of
suppliers, and in many cases demanders conducted excessive reductions to avoid a non-compliancepenalty just before 30 minutes. Although this caused efficiency losses, these were minor.
(ii) In sessions Bc3, Bo1, D2, D3 and D4 (the early point equilibrium price decrease case), at theearly stage high contracted prices and/or expectation of high prices in the future caused somesubjects' excessive reductions, which caused the immediate drop of the point equilibrium price.
However contracted prices did not drop immediately due to the inertia of contracted prices so thatsome subjects continued to reduce their emissions to levels where their MACs exceeded the new
point equilibrium price, which then caused the point equilibrium price to decrease even further. This
cycle caused great efficiency losses.
We now compare the two groups.
Result 5. (i) The modified efficiency of the constant price case is higher than that of the early pricedecrease case.

15

(ii) The discrepancy area of the constant price case is smaller than that of the early price decrease
case.
(iii) The time at which the point equilibrium price becomes lower than the competitive equilibrium
price in the constant price case is later than that in the early price decrease case.
(iv) The amount of net over-reduction, i.e., the sum of the permits left over at the end of a session, issmaller in the constant price than in the early price decrease case.
Support. (i) The mean of the modified efficiency of the constant price case is statisticallylarger than that of the early price decrease case at the 5% significant level.14(ii) The mean of the discrepancy area of the constant price case is statistically smaller thanthat of the early price decrease case at the 1% significant level.15(iii) The mean of the time when the point equilibrium price becomes smaller than thecompetitive equilibrium price in the constant price case is statistically later than that in theearly price decrease case at the 1% significant level.
(iv) The mean of the amount of net over-reduction in the constant price case is statisticallysmaller than that in the early price decrease case at the 1% significant level. █5.3 Comparison of Trading Institutions
In this section, we compare how the trading institutions generate different resultsin the two groups. First, we compare the probabilities of the two trading institutions
resulting in the constant price case and compare the probabilities of the two trading
institutions resulting in the early price decrease case.
Result 6. Bilateral trading is more likely to result in the constant price case and less likely to resultin the early price decrease case than double auction.
Support. In bilateral trading, six of eight sessions, 75%, resulted in the constant price caseand two of eight sessions, 25%, in the early price decrease case. In double auction, one offour sessions, 25%, resulted in the constant price case and three of four sessions, 75%, in theearly price decrease case. The probability that a bilateral trading session results in theconstant price case is statistically higher than the probability that a double auction session

14 We use a nonparametric Mann-Whitney U test because the difference between the variances isstatistically significant at the 5 % level.
15 See footnote 13.

16

will at the 10% significant level. The probability that a bilateral trading session results inthe early price decrease case is statistically lower than the probability that a double auction
session does at the 10% significant level. █Finally, we observe the difference between the modified efficiency of double
auction and that of bilateral trading within each group.
Result 7. In both groups, the modified efficiency of double auction is higher than that of bilateral
trading.
Support. Within the early price decrease case, all of the double auction sessions attained
higher efficiency than any other bilateral trading sessions. In the group, the mean of themodified efficiency of double auction is statistically higher than that of bilateral trading at
the 5% significant level. Within the constant price case, the double auction session also
attained higher modified efficiency than any other bilateral trading sessions.16 █Our primary objective in this paper is to demonstrate which is the better market
institution, double auction or bilateral trading. However when we compare all sessions in
Result 2 (ii), a significant difference between the modified efficiencies is not observed.
However, from Results 6 and 7, we determine the reason why the difference is notobserved, namely that although double auction attains higher modified efficiency thanbilateral trading in each group, the early price decrease case, which is likely to result in low
modified efficiency, occurs more frequently in double auctions, so that the two effects
offset each other and we cannot observe a significant difference. Besides the existence of thetwo groups, i.e., Result 3, these characteristics of each institution concerning two groups,
i.e., Result 6 and 7, are the main findings of this paper.
6. Concluding Remarks and Policy Implications
Two patterns of price dynamics were found in the experiment. In the constantpoint equilibrium price case, relatively low prices at an early stage caused insufficientemissions reduction of suppliers, and demanders therefore conducted excessive reductions
immediately before the end of the investment period. Efficiency was relatively high in this16 We cannot do a statistical test because the sample size of double auction is one.

17

case. On the other hand, in the early point equilibrium price decrease case, due to fear of
non-compliance, some subjects conducted excessive domestic reductions at an early stage,and hence, the point equilibrium price dropped at the early stage of the transactions.
However contracted prices did not drop immediately because of price inertia. The
efficiency of this pattern was relatively low. In each pattern, the modified efficiency of
double auction sessions was higher than that of bilateral trading. However, this does notnecessarily imply that double auction is better than bilateral trading since we found justone double auction session in the constant point equilibrium price case where the modified
efficiency is higher than that of the early point equilibrium price decrease case.
For efficiency before modification, we found that most of the parties realized abenefit from emissions trading compared with that of domestic reductions only.
Furthermore, we found over-reduction of GHGs in both patterns. Although thisreduced market efficiency, it greatly contributed to reducing GHGs, which would be
beneficial to future generations as under the Kyoto Protocol the banking of emissions
permits is allowed, and hence permits generated from over-reduction would be used inlater years.
It is not easy to determine policy implications from the results of our experiment,
but it seems that a strategy based on "carrying out reduction investment immediately
responding to the market price" was not successful. Rather, it seems that a party should
gradually purchase emissions permits if the market price is cheaper than the marginal
abatement cost, and it should gradually carry out abatement investment otherwise. In orderto verify this statement, however, further experiments are needed.
Experimental economists have found that double auction is one of the best
institutions for trading. However, in an environment incorporating investment decisions
explicitly such as in our experiment, it seems that double auction is not always the best
institution. For example, in bilateral trading, the market price does not move in one
direction since information such as price and quantity is not centralized and it therefore
takes a considerable amount of time for it to be disseminated to the participants. Further
study is also needed on this matter.
References
Baron, Richard, "Emission Trading: A Real Time Simulation," November 2000.
Bohm, Peter, A Joint Implementation as Emission Quota Trade: An Experiment Among Four
Nordic Countries, Nord 1997:4 by Nordic Council of Ministers, June 1997.

18

Bohm, Peter and Björn Carlén, "Emission quota trade among the few: laboratory evidenceof joint implementation among committed countries," Resource and Energy Economics,
vol. 21-1, 1999.
Davis, Douglas D. and Charles A. Holt, Experimental Economics, Princeton University
Press, 1993.
Godby, Robert W., Stuart Mestelman, and R. Andrew Muller, "Experimental Tests ofMarket Power in Emission Trading Markets," Environmental Regulation and Market
Structure, Emmanuel Petrakis, Eftichios Sartzetakis, and Anastasios Xepapadeas(Eds.), Cheltenham, United Kingdom: Edward Elgar Publishing Limited,
forthcoming, September 1998.
Hizen, Yoichi, and Tatsuyoshi Saijo, "Designing GHG Emissions Trading Institutions in the
Kyoto Protocol: An Experimental Approach," December 1998 forthcoming inEnvironmental Modelling and Software.
Muller, R. Andrew and Stuart Mestelman, "What Have We Learned From Emissions
Trading Experiments?" Managerial and Decision Economics 19(4-5), June-August
1998, pp. 225-238.
Saijo, Tatsuyoshi, "Choosing a Model out of Many Possible Alternatives: Emissions Trading
as an Example," mimeo., November 2000.

19

This is a sample
graph. We will
distribute the graphthat you will use after
the instruction.

250

250

(87)
200

200

(72)
150

150

(53)
100

100

(33)
50

50

(14)

0

20

10

30

40

50

60

80

70

90

100

Your goalYour initial
position

Figure 1. A Sample Graph

MAC

MAC
Marginal Abatement
Cost Curve
b

b
a

0
Initial Position

Figure 2-1

New Marginal
Abatement Cost Curvea

Emissions0

New Position

Figure 2-2

Figure 2. Abatement Irreversibility

Emissions

MAC
Marginal Abatment
Cost Curve
b

p

c

p"

a
Emissionsp'0

Initial Position

Kyoto Target

Figure 3. A Possible Strategy

1-Russia 2-Ukraine 3-USA 4-Poland 5-EU 6-Japan
6
5
3
4
2

1

240
(-45)

215

250

240

250

(-15)

(-27)

220

216

(-80)

210

200

(-50)

(-10)

180

(-35)

200

(5)

(-22)

165

166

120

(-20)

(-65)
(-55)

(-20)

70 (-10)

(-32)

122
(23)
(25) 118

(-17)

(-30)

150

130
(10)

100
80

90

60

(15)

142

150
120

118

190

170

162

(-40)

(-73)

initial position

(-5)

100

90

88

(20) (25)(-5)(50) (55)(35)(40)

60

40 50

40

(-10)

20

(10)

30

20
(33)

-80

-70

-60

-50

-40

-30

-20

-10

0

10

15

20

30

No country names were given to subjects in the experiment.

Figure 4. All Marginal Abatement Cost Curves

45

50

60

MAC
Supply Curve
b
p*
p'

Kyoto
Targeteae'

New Demand
Curve afterOver-Reduction

InitialPositionNew
Position

EmissionsFigure 5. Point Equilibrium

MAC
A's Supply
Curve
i
p

B's
Positionn jkB's Demand
Curve
q l
m
0
Emissions
A's
Kyoto
PositionTargetFigure 6. Re-evaluation of Permit Surplus

280

Price

Bc1

260

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200
180

E

160
140
120
100
80
60

R J

A

R

E

E

P
A
E A
R J
10 5 10

5

10

20
E 5
U
A
10

P R

U
3

U

5
U

5

U

P

P

5

J

A

J

A

5

5

10
U sold 10
units to A

J conducted 5 unitsof domestic reduction

5
R

E
U
E
10
A
5
27 U PR
J
U8 2
5
5R

J

U

A

3
U

J R
J 3

3

The Constant Price Case85

5 Units of Over-compliance

5

40
20
0
0

5

10

15

20

25

30
35
Minutes

40

45

50

55

60

Figure 7. The Constant Price Case

280

Price

D2

260

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200

U

J

A

5

10
U sold 10
units to A

J conducted 5 unitsof domestic reduction

180
160
140
120

R

100

A

A
30

80

5
P

P
5

A J
U JR J
10 R E
10 15
20
E
10
A
J R UAA
2
10 10 10 25
A
R
E 5 J
5 23
U
10

5

60

Discrepancy
Area

R

UP
2

The Early Price Decrease Case47 Units of Over-compliance

5

40
20

R

U
5

0
0

5

10

15

20

25

30
Minutes

35

40

45

Figure 8. The Early Price Decrease Case

50

55

60

The Early Point Equilibrium Price
Decrease Case
44.9%

1600

Bo1

Discrepancy Area

1400

83.8%

(-3.9%)

D2

1200(35.0%)

1000

91.9%

D3

(85.1%)

74.2%

D4

800
59.2%

(34.0%)

Bc3

600

94.4%

(11.0%)

Bo4(82.1%)
95.7%
87.9%

400
200
0
0.00

The Constant Point
EquilibriumPrice Case
0.20

0.40

80.3%

Bc4

Bo3

(77.6%)
99.4%

Bc1

0.60

(73.1%)
0.80 89.1%

Bc2

Modified Efficiency(80.1%)

1.00
95.6%

D1

Bo2

(34.8%)

Figure 9. Two Groups

Bilateral Trading
Session No.
Bc1
Bc2
Bc3
Subject No.
1 (2555)
1535
1600
620
(Russia)
0.601 0.626 0.243(-32)(-55,0) -40, 0 -32, 0 -65, -22
2 (1290)
766
1175
1820
(Ukraine)
0.594 0.911 1.411(-10)(-30,0) -28, 0 -20, 0 -30, 0
3 (610)
1046
220
556
(U.S.A.)
1.715 0.361 0.911(55)(50,0)
23, 0 30, 323, 0
4 (390)240
100
20(Poland)0.615 0.256 0.051(-5)(-10,0)-5, 0 -10, 0 -17, 0
5 (620)
-650
375
850
(EU)
-1.048 0.605 1.371(25)(20,0)
5, -5
10, 0
25, 0
6 (1525)2175
2130 -3100(Japan)1.426 1.397 -2.033(40)(25,0)35, 0
25, 0 15, -25
Sum (6990) 5112
5600
766
Efficiency 0.731 0.801 0.110
Sum (6990) 5612
6230
4136
Modified
0.803 0.891 0.592

Bc4

Bo1

Bo2

Bo3

Bo4

656
1415
384
0.257 0.554 0.150-42, 0 -55, -3 -52, 0
700
-565
2625
0.543 -0.438 2.035-20, 0 -20, -15 -20, 01416 -4130 -4094
2.321 -6.770 -6.711
23, 0 -20, -30 50, 23
94
77
500
0.241 0.197 1.282-10, 0 -10, 0 -10, 0
850
1002
975
1.371 1.616 1.573
20, 0
20, 0
20, 0
1710
1931
2040
1.121 1.266 1.338
35, 6
35, 0
25, 0
5426
-270
2430
0.776 -0.039 0.348
6686
3140
6680
0.957 0.449 0.956

1825
0.714
-33, 01285
0.996-25, 0
481
0.789
23, 0
300
0.769
-13, 0
630
1.016
20, 0
1625
1.066
25, 0
6146
0.879
6146
0.879

1465
0.573
-52, 02200
1.705-20, 0316
0.518
23, -2450
1.154-10, 0965
1.556
20, -2340
0.223
30, -5
5736
0.821
6596
0.944

Table 1. Efficiency Table

Double Auction
D1
D2

D3

D4

1425
2435
1360
2060
0.558 0.953 0.532 0.806-55, 0 -65, 0 -44, 0 -60, 01195-30
850 -1925
0.926 -0.023 0.659 -1.492-30, 0 -30, -27 -20, 0 -30, -37
890
641
769
-404
1.459 1.051 1.261 -0.662
40, 0
23, 0
23, 0
23, 0
165
275
375
763
0.423 0.705 0.962 1.956-10, 0 -10, 0 -11, 0 -17, 0
760
-900
770
682
1.226 -1.452 1.242 1.100
20, 0 10, -10
20, 0
20, 0
2515
25
1822
1200
1.649 0.016 1.195 0.787
35, 0 25, -10 25, -5 25 , 06950 2446
5946
2376
0.994 0.350 0.851 0.340
6950 5856
6426
5186
0.994 0.838 0.919 0.742

Appendix 1. Price Dynamics (Bc sessions)
280

Price

280

Bc1

260

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200
180

E

160
140
120
100
80
60

R J

A

R

E

E

P
A
E A
R J
10 5 10

5

10

20
E 5
U
A
10

U

P R

U

P

5
U

3
5

U
P

J

5

5R
5

260

J

A

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA220

J conducted 5 unitsof domestic reduction

JA
10
U sold 10
units to A
U

200

5
J conducted 5 unitsof domestic reduction

180
160

5
R

A

3
U

140

J R
J 3

3

100

The Constant Price Case
Permit surplus: 5

8

5

5

U
U

120

P

E

A

5

J

R J
10
A
E
5

5

80

5

5

R

40

20

20

J A
10 J

E
10

E
5

J
JR
A
P A
5 U
5
J
5
10
J
P
5
5
U

60

40

5

R

A

10

A
20

12

The Constant Price Case
Permit surplus: -3

U
5

0

0
0

280

Bc2

240

5

10
U sold 10
units to A

E
U
E
10
A
5
27 U PR
J
U8 2
5

A

J

U

Price

5

10

15

20

25

30
35
Minutes

40

45

50

55

Price
R: Russia
U: Ukraine
A: USA

240
220

P: Poland
E: EU
J: Japan200

A
10
U sold 10
units to A

10

15

Bc4

260

J

U

5

J conducted 5 unitsof domestic reduction

25

30
35
Minutes

R: Russia P: Poland
U: Ukraine E: EU
A: USA
J: Japan

240

5

20

220

45

50

55

60

J

A
10
U sold 10
units to A
U

200

180

40

Price

280

Bc3

260

0

60

5
J conducted 5 unitsof domestic reduction

180

160

U

140

J
J R
10
10

J
10

100
80

R

A

5

160

P

140

5

R A
A
10
U R
R A
P
10 27
7
8
10

10

10 U E
A 10
R
J 5

P E
10

5

60

J
10
E

P

J

120

R

U J
10 E

10
U
10

R

R

8 P
5

5

P
2

J
A

120
P JU E
5 5

100

The Early Price Decrease Case
Permit surplus: 47

60

40

40

20

20

0

R

80

J
30
U A
10

R

5

A

A

E
5

20
7
U E
A J U
A
10
5 10 R R
R J
J PE
8
2
10
5
5
P
R
U
5
3
10

P

20

40

J
2

U

J
5

The Constant Price Case
Permit surplus:-6

0
0

5

10

15

20

25

30
35
Minutes

40

45

50

55

60

0

5

10

15

25

30
35
Minutes

45

50

55

60

Appendix 1. Price Dynamics (Bo sessions)
Price

280
260

280

Bo1

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200

U

240

5

10
U sold 10
units to A

J conducted 5 unitsof domestic reduction

U

220
R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

180

160

A

140

A

120

A

160

20

140

23
27
E
A
5
20 P
P J
3
U

R

80
60

J
R
P 20
P A
J
5 2

A U
2 P R
3
P E5
3

R
R

2

J

U

E

R
R13

10 P
2

U

2

2

80

The Early Price Decrease Case
Permit surplus: 48

40

J

10

100

5

R
A
10

10

R

A J
10

E

P

120

P E

J
10

A
15

200

180

100

Bo2

260

J

A

Price

U

R

60

E

20

U J
15

J

R

5

A
10

E J5
R J
P 5 5
10
5 R U

10

20
U
10

J

A
5
J
E
U
J
5
10
5
A

5
J conducted 5 unitsof domestic reduction

E

10
A

E

R

R

A
10
U sold 10
units to A
UR

The Constant Price Case
Permit surplus:-23

7

10

40
20

20

0

0
0

5

10

15

20

25

30
35
Minutes

40

45

50

55

280 Price

280

Bo3

260

0

60

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200

U

10
U sold 10
units to A

15

Bo4

240

5

10

25

30
35
Minutes

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA220

J conducted 5 unitsof domestic reduction

20

200

180

180

160

40

45

50

55

60

Price

260

J

A

5

U

J

A
10
U sold 10
units to A
U

5

J conducted 5 unitsof domestic reduction

J
15

160

140
120

P

100

R

E
3
J

5

80

P E
U A
4
15
R

P A
3
R E
5
P

J

U

J

R E
8

10
A

5

U A R J
5
5
AU
J
P
27 5
3
10

5

5

U

100 R

The Constant Price Case
Permit surplus: 0

10

60

P

120

R
1 J
5 P
3

E

5

140

80

10

60
40

20

20

R

U

R
5

E

R JU A
5 5

27
A

E
5

20

40
0

10
R

J

A

A

J

5

R A
10 J
5
P
R

5
P

5

5

12

P

5 10

E
5

JR E

The Constant Price Case
Permit surplus: 9

5

0
0

5

10

15

20

25

30
35
Minutes

40

45

50

55

60

0

5

10

15

20

25

30
35
Minutes

40

45

50

55

60

Appendix 1. Price Dynamics (D sessions)
280

Price

260

280

D1

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200

U

220

J conducted 5 unitsof domestic reduction

200

180

180

160

160

140
120
100
R

80

20

J

R EP J
5 5
J
5

60

R J
P A E AJ A
10
10 5
U J 5
R E
A 10
15
5
R
R
E 10
R 3
10 5
P
5
U

R
5

AU

5

140

U A
10 A
10
A 10 U

J

EU
5

E
5

The Constant Price Case
Permit surplus: 0

10

120

R

100

A

40
20

0

0

280

10

15

20

25

30
Minutes

35

40

45

50

55

260

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA

240
220
200

U

10
U sold 10
units to A

5

R

UP
2

10

15

5

The Early Price Decrease Case
Permit surplus: 47

20

25

30
Minutes

35

40

45

5

U

50

55

60

Price

D4

R: Russia
U: Ukraine
A: USA220

J conducted 5 unitsof domestic reduction

P: Poland
E: EU
J: Japan

200

J

A
10
U sold 10
units to A

U

5
J conducted 5 unitsof domestic reduction

180

160
120

A

240

180
140

5

260

J

A

5
J conducted 5 unitsof domestic reduction

A J
U JR J
10 R E
10 15
20
E
10
A
J R UA
A
2
10
25
10
10
R
E 5 J
5 23
U
10

5

J

A
10
U sold 10
units to A
U

R

0

280

D3

5

5
P

60

Price

P

60

20
5

A
30

80

40

0

R: Russia P: Poland
U: Ukraine E: EU
J: Japan
A: USA240

5

10
U sold 10
units to A

D2

260

J

A

Price

P
R E
10
A
27

100

A

80

P

5
5

60

160

P

A
J
P
U EU A1
10 5 10
A
R
A
U
J
2
10
E
J
R
J
55
5
12
U
10

E
1

12

E

J

P JR J
1 12
A
AR

120

1

100

J
1

80

The Early Price Decrease Case
Permit surplus: 5

40
20

60

The Early Price Decrease CaseJR EU A
3 10R J
P E
5 UA
R A R 7 P
R
R
A
J
J
27
5
R
7
E 13
10
10 10 9
R U
A
10
J
E
R
R
5 5
5
13 5
P U 105U
5
5

140 1010Permit surplus: 37

R
2

40

R

2

R

20

0

U E
5

E

E

A

E

U
8

U

9

1

0
0

5

10

15

20

25

30
35
Minutes

40

45

50

55

60

0

5

10

15

20

25

30
35
Minutes

40

45

50

55

60