Market Power in International Carbon Emissions Trading: A Laboratory Test

The prospect that governments of one or a few large countries, or trading blocs, would engage in trading of international greenhouse gas emissions has led several policy analysts to express concerns that trade would be influenced by market power. The experiment reported here mimics a case where twelve countries, one of which is a large buyer (the mirror-image of a large seller), trade carbon emissions on an emissions exchange (a double-auction market) and where traders have quite accurate information about the underlying net demand. The findings deviate from those of the standard version of market power effects in that trade volumes and prices converge on competitive levels.