Aton Experimental Economics Laboratory Publications Library

Last Updated: 5th August 2009

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Recent AEE Lab presentations

University of Sydney Workshop on Experimental Economics in the Energy Sector

Dr Rim Baltaduonis and Dr Karel Nolles presented a 1/2 day workshop at the University of Sydney on 27th July 2009 about the use of experimental economics for examining issues in the energy sector.

Download Rim's Presentation as PDF

Download Karel's Presentation as PDF


The Economics of Nutrient Farming

Presented by Dr. Brian Scott, visiting scientist from the University of Alabama at Birminghan.

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Policy Instruments and Experimental Economics

Presented by Dr. Brian Scott, visiting scientist from the University of Alabama at Birminghan.

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Experimental Economics in the Design of Environmental Markets

Presented by Dr. Andrew Reeson, experimental economist working with CSIRO Sustainable Ecosystems.

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Market Institutions & Human Behaviour

Presented by Dr. Andrew Reeson, experimental economist working with CSIRO Sustainable Ecosystems.

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Behavioural Anomalies

Presented by Dr. Andrew Reeson, experimental economist working with CSIRO Sustainable Ecosystems.

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Prediction Markets and Natural Resource Management

Presented by Dr. Andrew Reeson, experimental economist from CSIRO Sustainable Ecosystems.

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AEE Lab publications and working papers


Experimental Economics: Applications to environmental policy. 

Reeson A, Nolles K. 2009. Experimental Economics: Applications to Environmental Policy. Socio-Economics and the Environment in Discussion (SEED). CSIRO Working Paper Series Number 2009-03. March 2009. ISSN 1834-5638. 24 pp.

Incentives, regulations and other policy interventions intended to promote sustainability work through influencing human behaviour. There is therefore much to be gained from a thorough understanding of exactly how various policy interventions relate to the decision-making process.

Experimental economics, and the closely related fields of behavioural economics and behavioural finance, apply an empirical approach to study how people act when faced with a range of economic and social scenarios. The experimental approach was pioneered by Vernon Smith and Daniel Kahneman and others, building on early studies by Chamberlin (1948).  In recognition of this work, Kahneman and Smith were awarded the 2002 Nobel Prize in Economic Sciences.

This paper briefly reviews the applications and methods of experimental economics, relates some key research findings and describes some examples of its use in informing environmental policy.

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An experimental investigation of a gas pipeline merger on retail gas prices 

K. Nolles B. Scott,R. Burch,  J. Fahrer, A. Schönfeld (2006).

This project conducted with the Allen Consulting Group was to show how experimental economics can be applied to real life merger questions, and to examine the impact on consumer gas prices when two competing pipelines supplying gas merge, under cases with or without a dominant retailer buying gas from either of the two pipelines and selling gas to end use consumers.  The inspiration for this investigation was the proposed merger of two energy utilities AGL and Alinta, who respectively control the two gas pipelines into the Sydney basin.  In preparing the model we used data that is broadly based on the real situation of these companies, however we have not investigated their individual circumstances closely enough to consider this study to be of “real world significance”.  This project should rather be viewed as an example of how such a question can be investigated in an experimental manner.

We find that under conditions of a single owner of both pipelines, or when a dominant retailer at the end of the supply chain is present, there is potential for retail prices to rise above the competitive level.  

We use experimental economics to test the implications of market power, both wholesale and retail, in the gas industry.  Human participants are employed, acting as pipeline owners and retailers in a controlled environment, constructed using parameters broadly based on the actual Sydney gas market.

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How the forward market has raised the penalty rate for MRET, GGAS and GES by 20% 

K. Nolles (2006). "How the forward market has raised the penalty rate for MRET, GGAS and GES by 20%."  

In late 2006 the forward price for NSW Greenhousegas Abatement Certificates (NGACs) and Gas Electricity Certificates (GECs) approached and then exceeded by a small margin the applicable penalty rates. This apparently irrational trading behaviour represents the value placed by market participants in managing reputational and financial risks. In response to prices rising above the penalty rate, the Environmental Products Committee of the Australian Financial Markets Association altered the standard contract document used for forward trading of RECs, NGACs and GECs. The new version states that at settlement date there is an option for cash settlement at "1.2 x the tax adjusted legislative charge". In effect, this change raises the effective penalty price in the NGAC, GEC and REC markets (where this documentation is used) by 20%. It will affect ALL market participants, since it allows market prices to rise considerably above the government stated penalty rate (if supply and demand conditions demand it). This paper discusses how and why this occurred.

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An experimental investigation of the impact of a change in the REC Creation rule on the Australian Renewable Energy Market

K. Nolles (2006). "The Impact of the Delay between Energy Generation and  REC Creation in MRET". 

The centrepiece policy of the Australian Government in respect of supporting renewable energy generation is the Mandatory Renewable Energy Target, implemented by way of a tradeable Renewable Energy Certificate. A most unusual feature of the market is that a delay measured in years can exist between when energy is generated and when the associated certificate is created and becomes visible to the market.

We experimentally investigate the impact of this rule, and an alternative where certificates are created “instantly”. The rule change dramatically alters the performance of the market – with prices rising markedly and the distribution of benefits altering. The experiment suggests that a market design requiring retailers to meet hard annual targets is susceptible to generator manipulation, and that prices are strongly influenced by the level at which the non-compliance penalty is set, not by the underlying cost of supplying the renewable energy.

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Lessons on the Environmental Markets from the Financial Markets

K. Nolles (2006). "Lessons on the Design and Implementation of Environmental Markets from the Financial Markets".

Financial markets are large, well informed, highly liquid, well developed markets for that most fungible of all commodities – money. Even so, the financial markets suffer from non-ideal characteristics that have required the development of considerable regulation and market intervention by regulators. In comparison, environmental markets are tiny and illiquid – and as such are far less likely to meet the theoretical requirements for an efficient market. The argument for monitoring and intervention is if anything stronger in these markets.

Environmental markets have generally been implemented by government agencies different from those traditionally associated with the oversight and management of markets. While using markets to facilitate least cost implementation of environmental policy has real theoretical and practical benefits, lessons from the financial markets should be remembered. Areas for particular consideration would include: the roles of Over The Counter and Exchange Based trading, the treatment of risk, the linkages between spot markets and forward markets, and the role of the regulating authority to set targets and conduct market intervention.

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Is the Price Right?:  The Importance of Market Institution in Generating Prices

K. Nolles (2006). "The Importance of Market Institution in Generating Prices- A Review from Experimental Economics and Implications for Real World Experience".

This paper provides a review of the lessons from experimental economics in respect of the performance of different types of market institutions. From the fundamentals identified in the laboratory experiments, this paper then questions if current prices observed in the Australian MRET market, the New South Wales NGAC market, and the European Union Emissions Trading Scheme are likely to be genuinely reflective of the underlying supply and demand. A number of reasons drawn from the experimental evidence are outlined as to why observed prices may not be consistent with the underlying supply and demand.

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Useful References and Co-Authored Papers

Design Lessons for Market-Based Greenhouse Gas Regulation in Australia

Macgill, Outhred, Nolles (2006). "Some Design Lessons from Market-based Greenhouse Gas Regulation in the restructured Australian Electricity Industry,"   Energy Policy, Volume 34/1 pages 11-25, January 2006.

Amidst a growing worldwide interest in the use of market-based policy instruments for climate change regulation in the electricity sector, Australia has been an early and enthusiastic adopter of both electricity industry restructuring and market-based environmental instruments. This paper first outlines some of these recent policy developments with particular emphasis on the objectives, design and outcomes of electricity industry restructuring, the Mandatory Renewable Energy Target, the NSW Greenhouse Benchmarks, the Queensland 13% Gas scheme and Government accredited Green Power. From this, some key design lessons for such market-based instruments are identified and discussed.

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Proceedings of  6th Annual National Symposium of the Australian Agricultural and Resouce Economics Society

The 6th annual symposium of the Australian Agricultural and Resource Economics Society held in September 2003 focused on market-based tools for environmental management. This two day conference explored a range of issues surrounding the design and implementation of market-based instruments to manage natural resources and the environment, and new ways to address them. Outhred, Macgill and Nolles presented a Winning poster paper at this event entitled “Experience with Market-based Approaches to Climate Change Regulation in the Australian Electricity Industry".The conference proceedings can be downloaded below.

Macgill, Outhred, Nolles (2003). "Experience with Market-based Approaches to Climate Change Regulation in the Australian Electricity Industry",   Pages 63-69, Conference Paper at the 6th Australian Agricultural and Resource Economics Society (AARES) Annual National Symposium.

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Market Based Environmental Regulation in the Australian Electricity Industry

Macgill, Nolles, Outhred (2003). "Market Based Environmental Regulation in the Restructured Australian Electricity Industry,"   Conference Paper at the 26th IAEE International Conference.

This paper provides an overview of recent developments in market-based environmental regulation of greenhouse emissions in the Australian electricity industry. In particular, the objectives, design and outcomes of industry restructuring, the Mandatory Renewable Energy Target, the NSW Greenhouse Benchmarks, the Queensland 13% Gas scheme and Government accredited Green Power are examined. Key design issues are shown to include necessary abstractions for implementing such market schemes, the moral hazards that can arise (particularly with 'baseline and credit' approaches) and the potential for measures to interact in ways that reduce their respective environmental effectiveness.

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The Implications of National Emissions Trading for Australia

Macgill, Outhred, Nolles (2003). "National Emissions Trading for Australia: Key Design Issues and Complementary Policies for Promoting Energy Efficiency, Infrastructure Investment and Innovation,"   Australian Journal of Management (AJEM) Volume 11 Number 1, March 2004.

The recent CoAG Energy Market Review has called for a national emissions trading scheme to replace a number of existing greenhouse-related policy mechanisms in Australia. In this paper, some of the possible limitations with emissions trading, and the potential for appropriate scheme design choices and complementary policy measures are discussed. Key design questions for emissions tradings schemes, such as coverage and permit allocation, are addressed, with a particular focus on the policy challenges of driving improved energy efficiency, appropriate infrastructure investment and technological innovation.

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The following paper will be available for download shortly....

Nolles, Hughes (2001). "Greenhouse and Sustainable Profits at Risk in the Electricity Industry,"   Finance and Treasury Association Journal

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More information about Experimental Economics

You may be interested to read the following materials at the Interdisciplinary Center for Economic Science at George Mason University.  ICES is headed by Professor Vernon Smith, who was the co-recipient of the 2002 Nobel Prize for Economics, in recognition of his contributions to the field of Experimental Economics.

The links below take you to the ICES website.  The materials are ICES Copyright.

FAQ about Experimental Economics

FAQ about Experimental Economics

Economics in the Laboratory

V. Smith, (1994). "Economics in the Laboratory," Journal of Economic Perspectives 8(1), 113-131

Experimental Methods in Economics

V. Smith, (1987). "Experimental Methods in Economics," The New Palgrave: A Dictionary of Economics, John Eatwell, Murray Milgate, and Peter Newman

Microeconomic Systems as an Experimental Science

V. Smith, (1982). "Microeconomic Systems as an Experimental Science," American Economic Review 72(5), 923-955

   



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