Marketable Emissions Permit Game

You will each be given one permit and you must pay the abatement cost on your card for any units you produce without permits. At the beginning of this period, you will be given a few minutes to buy and sell permits from each other. If you wish to buy or sell a permit, you should announce that you will buy or sell a permit and the price at which you are willing to make that transaction. You may negotiate with one or more firms if you so desire. At the end of the trading period, you must commit to a level of production (0 units, 1 unit, or 2 units), submit any permits that you have, and pay abatement costs for any units that you produce without accompanying permits.

As you negotiate with other firms consider this. If you are a firm with high cost pollution abatement you are better off if you buy a permit for a price below your abatement cost. If you are a firm with low cost pollution abatement you are better off if you sell your permit for a price above your abatement cost.

If you hold one permit and produce two units, you incur the cost on your card to comply with the EPA regulation. If you have no permits at the end of the period and you choose to produce two units of the good, you incur two times the cost number on your card to comply with the EPA regulation. Permits cannot be carried over from period to period.

Subsequent periods will be conducted in a similar manner, however, the initial distribution of permits will vary from period to period:

• All permits are distributed to new technology firms
• All permits are distributed to old technology firms.
• All permits are distributed by sealed-bid second price auction.

Also, we may have time to consider the effects of further emissions reductions (fewer permits) and demand for emissions reductions by non-polluters.