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The Regulatory Choice of Noncompliance in Emissions Trading Programs

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  • John K. Stranlund

    () (Department of Resource Economics, University of Massachusetts Amherst)

Abstract

This paper addresses the following question: To achieve a fixed aggregate emissions target cost-effectively, should emissions trading programs be designed and implemented to achieve full compliance, or does allowing a certain amount of noncompliance reduce the costs of reaching the emissions target? The total costs of achieving the target consist of aggregate abatement costs, monitoring costs, and the expected costs of collecting penalties from noncompliant firms. Under common assumptions, I show that allowing noncompliance is cost-effective only if violations are enforced with an increasing marginal penalty. However, one can design a policy that induces full compliance with a constant marginal penalty that meets the aggregate emissions target at lower expected costs. This last result does not depend on setting an arbitrarily high constant marginal penalty. In fact, the marginal penalty need not be higher than the equilibrium marginal penalty under the policy with the increasing marginal penalty,and can actually be lower. Finally, tying the marginal penalty directly to the permit price allows the policy objective to be achieved without any knowledge of firms’ abatement costs.

Suggested Citation

  • John K. Stranlund, 2006. "The Regulatory Choice of Noncompliance in Emissions Trading Programs," Working Papers 2006-7, University of Massachusetts Amherst, Department of Resource Economics.
  • Handle: RePEc:dre:wpaper:2006-7
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    File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2006-7.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hugo Salgado & Carlos Chávez, 2016. "Using Taxes to Deter Illegal Fishing in ITQ Systems," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(4), pages 709-724, August.
    2. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2011. "An experimental analysis of compliance in dynamic emissions markets," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 414-429.
    3. Villegas, Clara & Coria, Jessica, 2009. "Taxes, Permits and the Adoption of Abatement Technology under Imperfect Compliance," Working Papers in Economics 368, University of Gothenburg, Department of Economics.
    4. repec:bpj:jossai:v:5:y:2017:i:2:p:111-127:n:2 is not listed on IDEAS
    5. John K. Stranlund & James J. Murphy & John M. Spraggon, 2013. "Imperfect enforcement of emissions trading and industry welfare: a laboratory investigation," Chapters,in: Handbook on Experimental Economics and the Environment, chapter 9, pages 265-288 Edward Elgar Publishing.
    6. repec:kap:itaxpf:v:24:y:2017:i:6:d:10.1007_s10797-017-9439-2 is not listed on IDEAS
    7. John Stranlund & Carlos Chávez, 2013. "Who should bear the administrative costs of an emissions tax?," Journal of Regulatory Economics, Springer, vol. 44(1), pages 53-79, August.
    8. Carmen Arguedas, 2013. "Pollution standards, technology investment and fines for non-compliance," Journal of Regulatory Economics, Springer, vol. 44(2), pages 156-176, October.
    9. Andreas Oestreich, 2015. "Firms’ Emissions and Self-Reporting Under Competitive Audit Mechanisms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(4), pages 949-978, December.
    10. Carmen Arguedas, 2008. "To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(2), pages 155-168, October.
    11. Alessio D’Amato & Edilio Valentini, 2011. "Enforcement and environmental quality in a decentralized emission trading system," Journal of Regulatory Economics, Springer, vol. 40(2), pages 141-159, October.
    12. Ian MacKenzie & Markus Ohndorf, 2012. "Optimal monitoring of credit-based emissions trading under asymmetric information," Journal of Regulatory Economics, Springer, vol. 42(2), pages 180-203, October.
    13. Stranlund, John K. & Chávez, Carlos A. & Villena, Mauricio G., 2009. "The optimal pricing of pollution when enforcement is costly," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 183-191, September.
    14. Arguedas, Carmen & Rousseau, Sandra, 2009. "A note on the complementarity of uniform emission standards and monitoring strategies," Working Papers 2009/12, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    15. Pauli Lappi, 2016. "The welfare ranking of prices and quantities under noncompliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 269-288, April.
    16. Stranlund, John K. & Moffitt, L. Joe, 2014. "Enforcement and price controls in emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 67(1), pages 20-38.

    More about this item

    Keywords

    Compliance; Enforcement; Emissions Trading; Monitoring; Transferable Permits;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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