Resources, Energy and Environmental Markets Laboratory (REEML)

Research

Applications of experimental economic methods in agricultural and resource economics include emissions trading, electricity and energy markets, water markets, and environmental and agricultural decision-making. Experimental economic methods enable researchers to focus on the key features of a market or other economic interactions whilst controlling for other factors. Experiments can be used to test theories, establish empirical regularities, compare alternative market rules, evaluate policy proposals and design new markets (Smith, 1994[1]).

Emissions trading

REEML is currently applying experimental economic methods to test a number of important questions concerning the design of emissions trading schemes. These include the impact of alternative market structures such as initial allocation mechanisms, banking and borrowing rules, market transparency, the certainty of forward allocations and investments in alternative technologies.

Electricity and energy markets

Experimental economic methods are used to develop and evaluate market institutions for trade in electricity and energy production and transmission. By designing and testing markets before implementation, experiments provide a way to compare market performance against performance criteria. Experiments can be used to test for unforeseen consequences of a market policy before implementation.

Experimental research into electricity markets has highlighted the importance of considering strategic behaviour when comparing alternative institutional designs (Baltaduonis, 2006[2]). Experiments are used to design new auction mechanisms and test alternative institutions. For example, Baltaduonis (2007a[3]) compared two alternative auction designs for wholesale electricity markets. The choice of auction institution had consequences for price volatility. Baltaduonis (2007b[4]) found that a simple-offer auction reduced electricity prices for consumers and lowered price volatility. It also mitigated anti-competitive effects that were observed in complex-offer auctions, thereby achieving efficient outcomes more quickly.

Tiho Ancev, Rim Baltaduonis, and Tim Capon are starting work on a new project with the Australian Financial Markets Association (AFMA) entitled "Emissions trading and the design and operation of Austraila's energy markets.

Rim Baltaduonis visits the University of Sydney regularly as part of his ongoing research into electricity markets. Email him at

Water markets

With the establishment of property rights for water entitlements and water markets for irrigation supplies, experiments have been used to compare alternative auction institutions for water market design and managing the external environmental impacts of water use (Tisdell et al., 2004[5]). Another example of this type of research used experiments to compare alternative institutions for managing downstream consequences of land-use changes in the presence of water markets (Nordblom et al., 2009[6]). The design of market institutions and alternative approaches for purchasing water entitlements to manage environmental flows and other ecological outcomes is one important focus of current experimental research in this area.

Environmental and agricultural decision-making

Incentives, regulations and other policy interventions aim to promote sustainability by influencing human behaviour (Reeson and Nolles, 2009). This means that a thorough understanding of the relationship between policy interventions and the decision-making process can provide valuable contributions to environmental policy.

Experiments can be used as a tool to develop and refine economic theory, to test policies in a laboratory environment before implementation and to study the underlying social norms that affect economic and environmental outcomes (e.g., Reeson and Tisdell, 2008[7]). Economic experiments can be used to examine the psychological and behavioural factors that influence economic decisions. Important questions in environmental decision-making include:

  • The valuation of ecosystem goods and services
  • Behaviour in social dilemmas resulting from the provision of public goods or common pool resources
  • The design and evaluation of market-based instruments for agricultural and environmental policy

Development economics and field experiments

Researchers in both the Agricultural and Resource Economics group in the Faculty of Agriculture and Environment and the Social and Economic Sciences group at CSIRO Sustainable Ecosystems have research interests in the use of field experiments. As well as pilot studies in the field to research market-based instruments for natural resource management, this research includes the use of field experiments in developing countries.

For example, Shyamal Chowdhury in collaboration with Ahmed Mushfiq Mobarak at Yale University, and PKSF Bangladesh has implemented a field experiment in the Rangpur districts of Bangladesh under the research project titled “Mitigating Seasonal Poverty through Domestic Migration in Bangladesh”.

In the Rangpur districts of North Western Bangladesh, poverty and chronic food shortages remain an enduring part of rural life. A seasonal famine known locally as the Monga occurs in these areas with disturbing regularity. Despite few local work opportunities, migration to seek employment opportunities in urban areas is relatively uncommon during the Monga. The primary objective of their research was to test whether integration of labour markets through migration could play any role in mitigating the effects of the seasonal famine.

A randomized intervention was used to experimentally vary the incentives and support provided to individuals living in areas of Bangladesh that are subject to seasonal famine. By examining the costs and incentives necessary to promote migration, this research helps to identify the non-pecuniary components of the migration decision, including psychological costs, and the roles of kinship and social networks. The experiment helps answer research questions linked to seasonal deprivation, labour market integration, and migration. It also has immediate relevance for policies designed to alleviate seasonal poverty in Bangladesh.

Their work contributes to the design and implementation of policies and programs that aim to address severe malnutrition, poverty and hunger. It also contributes to the literature on urban-rural migration that views migration as both an income maximization and risk minimization decision. The project is funded by the Australian Development Research Awards.

Footnotes

  1. Smith, Vernon (1994), Economics in the laboratory. The Journal of Economic Perspectives, (8), 1, 113-131 www.jstor.org/stable/2138154
  2. Baltaduonis, Rimvydas (2006), Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction. Department of Economics Working Paper Series, University of Connecticut Working Paper 2006-04R.
  3. Baltaduonis, Rimvydas (2007a), An Experimental Study of Complex-Offer Auctions: Payment Cost Minimization vs. Offer Cost Minimization. Department of Economics Working Paper Series, University of Connecticut and George Mason University Working Paper 2007-13.
  4. Baltaduonis, Rimvydas (2007b), Simple-Offer vs. Complex-Offer Auctions in Deregulated Electricity Markets, Department of Economics Working Paper Series
    University of Connecticut and George Mason University, Working Paper 2007-14.
  5. Tisdell, John G., John R. Ward, and Tim Capon, (2004), Impact of communication and information on a complex heterogeneous closed water catchment environment. Water Resources Research, VOL. 40, W09S03, doi:10.1029/2003WR002868
  6. Nordblom, Tom, A. Reeson, J. Finlayson, I. Hume, S. Whitten and J. Kelly (2009), Experiments with regulations & markets linking upstream tree plantations with downstream water users. 53rd Annual Conference of the Australian Agricultural and Resource Economics Society Cairns, February 10-13.
  7. Reeson, Andrew and John Tisdell (2008), Institutions, motivations and public goods: An experimental test of motivational crowding, Journal of Economic Behavior and Organization, 68(1), 273-281.