Abstract
Given the heterogeneous participants and temporal breaks involved in emission trading, it is reasonable to find permanent deviation of these markets from a rational expectation equilibrium (REE) status. However, the REE assumption underlies most existing studies, including those focused on the price-deviation phenomenon. They tend to ignore the heterogeneity among regulated firms, as well as the effects of such heterogeneity on emission trading, market equilibrium, and market efficiency. For the first time, we abandon the equilibrium assumption in the analysis of emission-trading markets and develop an artificial market in which regulated firms are modelled as heterogeneous agents with different allowance demands, abatement costs, technology preferences, and market expectations. Their behaviours are governed by a set of pre-specified rules, rather than directed by the economic optimization goals. The firms in China’s iron and steel sector are selected for simulation. Our results identify some phenomena that can hardly be explained under a REE framework: 1) carbon price significantly fluctuates and deviates from the REE value; 2) regulated firms tend to over invest in emission-abatement techniques, which further results in allowance over-supply in the markets; 3) while the emission-trading scheme does promote abatement actions among regulated firms, the theoretical arguments for its advantage in mitigation cost-saving seems illusionary. The artificial emission market establishment here may help policy makers better understand the irrational behaviours and phenomena in real-world emission trading, and thereby improve the design of emission- trading schemes.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
