Policing carbon markets

Carbon markets have emerged in recent decades as one of the most important tools for curbing industrial greenhouse gas emissions, but they present a number of novel enforcement challenges as compared to more conventional pollution regulations. To shed light on the practical issues involved in policing carbon markets, this study presents the first comprehensive analysis of the EU Emissions Trading System, a single programme that was policed by up to 31 different national regulators. Since 2006, 98.8% of installations in the EU ETS have complied with the regulation according to official data. The observed non-compliance should have resulted in €13 billion in total fines, but only €2.1 billion appear to have been collected. More generally, variation in the probability and severity of fines across national jurisdictions and time explain just one-tenth of the variation in compliance rates. This pattern of high rates of compliance coupled with low rates of enforcement is known in the literature as ‘Harrington’s paradox’. Meanwhile, other enforcement strategies that have been pointed to as resolutions to Harrington’s paradox in other applications, such as ‘naming and shaming’, appear to have had little discernible effect. Therefore, resolving Harrington’s paradox in the context of cap and trade regulation remains a fruitful area for future research.The EU ETS has met its emissions targets in the aggregate. The compliance rate is close to 99%.Yet non-compliance was often not followed by enforcement action. This combination of high rates of compliance and low levels of enforcement has previously been termed ‘Harrington’s paradox’.Several monitoring and enforcement strategies are investigated – e.g. naming and shaming of non-compliant companies, having the regulator appoint third-party auditors instead of letting companies choose their own, and suspending offenders. Yet no strong causal evidence of their effectiveness was found.Regulators adopted a pragmatic approach to enforcement – sometimes wary of fighting too many legal battles over fines, often choosing instead to work with polluters to bring them into compliance.The ETS’ novelty and inexperience present real problems for enforcement, even in countries with highly developed government bureaucracies. Building on existing experienced institutions is important.