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Optimal Monitoring for project-based Emissions Trading Systems under incomplete Enforcement

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Abstract

Project-based Emissions Trading Schemes, like the Clean Development Mechanism, are particularly prone to problems of asymmetric information between the project parties and the regulator. Given the specificities of these schemes, the regulator’s optimal monitoring strategy significantly differs from the one to be applied for capand- trade schemes or environmental taxes. In this paper, we extend the general framework on incomplete enforcement of policy instruments to reflect these specificities. The main focus of the analysis is to determine the regulator’s optimal spot-check frequency under the plausible assumption that the submitted projects vary with respect to their verifiability. We find that, given a limited monitoring budget, the optimal monitoring strategy is discontinuous, featuring a jump within the set of projects with lower verifiability. In this region, actual abatement is low and can fall to zero. For these cases, the sign of the slope of the strategy function depends on the actual relationship of the abatement cost and the penalty function. We conclude that, in a real-world context, project admission should ultimately be based on the criterion of verifiability.

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Bibliographic Info

Paper provided by IED Institute for Environmental Decisions, ETH Zurich in its series IED Working paper with number 10-13.

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Length: 30 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:ied:wpsied:10-13

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Keywords: environmental regulation; emissions trading systems; audits and compliance;

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  1. Macho-Stadler, Ines & Perez-Castrillo, David, 2006. "Optimal enforcement policy and firms' emissions and compliance with environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 51(1), pages 110-131, January.
  2. Robert Finger & Werner Hediger, 2008. "The Application of Robust Regression to a Production Function Comparison – the Example of Swiss Corn," IED Working paper 08-02, IED Institute for Environmental Decisions, ETH Zurich.
  3. Astrid Zabel & Karen Pittel & Göran Bostedt & Stefanie Engel, 2009. "Comparing Conventional and New Policy Approaches for Carnivore Conservation – Theoretical Results and Application to Tiger Conservation," IED Working paper 09-06, IED Institute for Environmental Decisions, ETH Zurich.
  4. Renate Schubert & Julia Blasch & Kristin Hoffmann, 2007. "Environmental Protection, Energy Policy and Poverty Reduction – Synergies of an Integrated Approach," IED Working paper 07-01, IED Institute for Environmental Decisions, ETH Zurich.
  5. Astrid Zabel & Brian Roe, 2009. "Performance Payments for Environmental Services : Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion," IED Working paper 09-07, IED Institute for Environmental Decisions, ETH Zurich.
  6. Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
  7. Julia Blasch & Renate Schubert & Birgit Soete, 2010. "Grün aus der Krise – Was können «grüne» Konjunkturpakete leisten?," IED Working paper 10-10, IED Institute for Environmental Decisions, ETH Zurich.
  8. Inés Macho-Stadler, 2008. "Environmental regulation: choice of instruments under imperfect compliance," Spanish Economic Review, Springer, vol. 10(1), pages 1-21, March.
  9. Stefanie Engel & Charles Palmer, 2008. "“Painting the Forest REDD?” Prospects for Mitigating Climate Change Through Reducing Emissions from Deforestation and Degradation," IED Working paper 08-03, IED Institute for Environmental Decisions, ETH Zurich.
  10. Stefanie Engel & Charles Palmer, 2009. "The Complexities of Decentralization in a Globalizing World," IED Working paper 09-08, IED Institute for Environmental Decisions, ETH Zurich.
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Cited by:
  1. Di Falco, Salvatore & Veronesi, Marcella, 2011. "On Adaptation To Climate Change And Risk Exposure In The Nile Basin Of Ethiopia," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115549, European Association of Agricultural Economists.
  2. Ian A. MacKenzie & Markus Ohndorf, 2011. "Optimal monitoring of credit-based emissions trading under asymmetric information," CER-ETH Economics working paper series 11/152, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  3. Justin Caron & Markus Ohndorf, 2010. "Irreversibility and Optimal Timing of Climate Policy," IED Working paper 10-14, IED Institute for Environmental Decisions, ETH Zurich.
  4. Michele Baggio, 2012. "The Optimal Management of a Natural Resource with Switching Dynamics," IED Working paper 12-19, IED Institute for Environmental Decisions, ETH Zurich.
  5. Julia Blasch & Mehdi Farsi, 2012. "Retail demand for voluntary carbon offsets - A choice experiment among Swiss consumers," IED Working paper 12-18, IED Institute for Environmental Decisions, ETH Zurich.
  6. Thomas Epper & Helga Fehr-Duda & Renate Schubert, 2011. "Energy-Using Durables: The Role of Time Discounting in Investment Decisions," IED Working paper 11-16, IED Institute for Environmental Decisions, ETH Zurich.
  7. Di Falco, Salvatore & Veronesi, Marcella, 2012. "Managing Environmental Risk in Presence of Climate Change: The Role of Adaptation in the Nile basin of Ethiopia," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134775, Agricultural Economics Society.
  8. Hilary Sigman & Howard F. Chang, 2011. "The Effect of Allowing Pollution Offsets With Imperfect Enforcement," NBER Working Papers 16860, National Bureau of Economic Research, Inc.
  9. Ines Kapphan & Pierluigi Calanca & Annelie Holzkaemper, 2011. "Climate Change, Weather Insurance Design and Hedging Effectiveness," IED Working paper 11-17, IED Institute for Environmental Decisions, ETH Zurich.
  10. Di Falco, Salvatore & Veronesi, Marcella, 2012. "Managing Environmental Risk In Presence Of Climate Change: Evidence From Ethiopia," 126th Seminar, June 27-29, 2012, Capri, Italy 126010, European Association of Agricultural Economists.

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