A Study of the Endowment Effect in Phase II and III of the EU Emissions Trading System
DOI:
https://doi.org/10.47611/jsrhs.v11i3.2761Keywords:
EU Emissions Trading System, Endowment effect, Environmental regulation, Cognitive bias, Climate change, Corporate decision-makingAbstract
This paper investigates the endowment effect in the European Union Emissions Trading System (EU ETS) over Phase II and Phase III using complete transaction records from the market. The results show that for most companies in both Phase II and Phase III, their WTA (willingness to accept)/WTP (willingness to pay) ratio is less than or equal to 1, signifying that there is an insubstantial degree of the endowment effect in the EU ETS. This challenges the results of a pioneering study and brings into light the need for a more rigorous study to re-examine the endowment effect in the carbon market.
Downloads
References or Bibliography
Brown, T. C., & Gregory, R. (1999). Why the WTA–WTP disparity matters. Ecological Economics, 28(3), 323–
https://doi.org/10.1016/s0921-8009(98)00050-0
Burtraw, D., & McCormack, K. (2017). Consignment auctions of free emissions allowances. Energy Policy, 107,
–344. https://doi.org/10.1016/j.enpol.2017.04.041
Calabuig, V., Fatas, E., Olcina, G., & Rodriguez-Lara, I. (2016). Carry a big stick, or no stick at all. Journal of
Economic Psychology, 57, 153–171. https://doi.org/10.1016/j.joep.2016.09.006
Carmon, Z., & Ariely, D. (2000). Focusing on the Forgone: How Value Can Appear So Different to Buyers and
Sellers. Journal of Consumer Research, 27(3), 360–370. https://doi.org/10.1086/317590
Carratù, M., Chiarini, B., & Piselli, P. (2020). Effects of European emission unit allowance auctions on corporate
profitability. Energy Policy, 144, 111584. https://doi.org/10.1016/j.enpol.2020.111584
Engelmann, D., & Hollard Guillaume. (2010). Reconsidering the Effect of Market Experience on the “Endowment
Effect.” Econometrica, 78(6), 2005–2019. https://doi.org/10.3982/ecta8424
EU Emissions Trading System (EU ETS). Climate Action. Retrieved December 19, 2021, from
https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets_en
Gronwald, M., Hintermann, B., Ellerman, D., Lange, A., Sartor, O., Lecourt, S., Pallière, C., Hieronymi, P.,
Schüller, D., Heindl, P., Wood, P. J., Jotzo, F., Mulder, A. J., Trück, S., Härdle, W., Weron, R., Martin, R., Muûls,
M., Wagner, U. J., . . . Pearcy, J. (2015). Emissions Trading as a Policy Instrument: Evaluation and Prospects
(CESifo Seminar Series) (Illustrated ed.). The MIT Press.
Horowitz, J. K., & McConnell, K. E. (2002). A Review of WTA/WTP Studies. Journal of Environmental
Economics and Management, 44(3), 426–447. https://doi.org/10.1006/jeem.2001.1215
Huang, J., Xue, Y., Jiang, C., Wen, F., Xue, F., Meng, K., & Dong, Z. Y. (2015). An Experimental Study on
Emission Trading Behaviors of Generation Companies. IEEE Transactions on Power Systems, 30(2), 1076–1083.
https://doi.org/10.1109/tpwrs.2014.2366767
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental Tests of the Endowment Effect and the Coase
Theorem. Journal of Political Economy, 98(6), 1325–1348. https://doi.org/10.1086/261737
Kahneman, D. (2013). Thinking, Fast and Slow (1st ed.). Farrar, Straus and Giroux.
Kolnhofer-Derecskei, A. (2017). The Indifferent, the Good Samaritan, the Brave and the Agent in Allais Paradox
situation – or How Endowment Effect Influences Our Decision in Case of Allais Paradox? Organizacija, 50(4),
–313. https://doi.org/10.1515/orga-2017-0022
Kreutzer, J. (2006). Cap and trade: a behavioral analysis of the sulfur dioxide emissions market. NYU Ann. Surv. Am. L. 62 (1), 125. https://www.law.nyu.edu/sites/default/files/ecm_pro_064603.pdf
Montague, R. (2007). Your Brain Is (Almost) Perfect: How We Make Decisions (Reprint ed.). Plume.
Morewedge, C. K., Shu, L. L., Gilbert, D. T., & Wilson, T. D. (2009). Bad riddance or good rubbish? Ownership
and not loss aversion causes the endowment effect. Journal of Experimental Social Psychology, 45(4), 947–951.
https://doi.org/10.1016/j.jesp.2009.05.014
Mullainathan, S., & Thaler, R. H. (2000). Behavioral Economics. SSRN Electronic Journal.
https://doi.org/10.2139/ssrn.245828
Novemsky, N., & Kahneman, D. (2005). The Boundaries of Loss Aversion. Journal of Marketing Research, 42(2),
–128. https://doi.org/10.1509/jmkr.42.2.119.62292
Shiloh, S., Salton, E., & Sharabi, D. (2002). Individual differences in rational and intuitive thinking styles as
predictors of heuristic responses and framing effects. Personality and Individual Differences, 32(3), 415–429.
https://doi.org/10.1016/s0191-8869(01)00034-4
Song, J. D., & Ahn, Y. H. (2019). Cognitive Bias in Emissions Trading. Sustainability, 11(5), 1365.
https://doi.org/10.3390/su11051365
Tong, L. C. P., Ye, K. J., Asai, K., Ertac, S., List, J. A., Nusbaum, H. C., & Hortaçsu, A. (2016). Trading experience
modulates anterior insula to reduce the endowment effect. Proceedings of the National Academy of
Sciences, 113(33), 9238–9243. https://doi.org/10.1073/pnas.1519853113
Tunçel, T., & Hammitt, J. K. (2014). A new meta-analysis on the WTP/WTA disparity. Journal of Environmental
Economics and Management, 68(1), 175–187. https://doi.org/10.1016/j.jeem.2014.06.001
International Emissions Trading Association. The EU’s Emissions Trading System.
https://www.ieta.org/resources/Resources/3_Minute_Briefings/phase%203%20eu%20ets_final.pdf
Wang, J., Gu, F., Liu, Y., Fan, Y., & Guo, J. (2020). An Endowment Effect Study in the European Union Emission
Trading Market based on Trading Price and Price Fluctuation. International Journal of Environmental Research and
Public Health, 17(9), 3343. https://doi.org/10.3390/ijerph17093343
Published
How to Cite
Issue
Section
Copyright (c) 2022 Sophia Qin; Edoardo Gallo
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright holder(s) granted JSR a perpetual, non-exclusive license to distriute & display this article.
