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The Regulatory Choice of Noncompliance in Emissions Trading Programs

  • John K. Stranlund

    ()

    (Department of Resource Economics, University of Massachusetts Amherst)

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.

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File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2006-7.pdf
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Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2006-7.

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Length: 32 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:dre:wpaper:2006-7
Contact details of provider: Web page: http://www.umass.edu/resec/

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  1. Carlos Chávez & John Stranlund, 2001. "Enforcing transferable permit systems in the presence of transaction cost," Working Papers 02-2001, Departamento de Economía, Universidad de Concepción.
  2. A. Mitchell Polinsky & Steven Shavell, 1999. "The Economic Theory of Public Enforcement of Law," NBER Working Papers 6993, National Bureau of Economic Research, Inc.
  3. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
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  5. Inés Macho-Stadler & David Pérez-Castrillo, 2004. "Optimal Enforcement Policy and Firm's Emissions and Compliance with Environmental Taxes," Working Papers 124, Barcelona Graduate School of Economics.
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  8. Carlos Chavez & John K. Stranlund, 2000. "Enforcing Transferable Permit Systems in the Presence of Market Power," Working Papers 04-2000, Departamento de Economía, Universidad de Concepción.
  9. Carmen Arguedas & Hamid Hamoudi, 2004. "Controlling Pollution with Relaxed Regulations," Journal of Regulatory Economics, Springer, vol. 26(1), pages 85-104, 07.
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  12. John Stranlund & Christopher Costello & Carlos Chávez, 2005. "Enforcing Emissions Trading when Emissions Permits are Bankable," Journal of Regulatory Economics, Springer, vol. 28(2), pages 181-204, 09.
  13. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  14. Murphy, James J. & Stranlund, John K., 2007. "A laboratory investigation of compliance behavior under tradable emissions rights: Implications for targeted enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 196-212, March.
  15. Garvie, Devon & Keeler, Andrew, 1994. "Incomplete enforcement with endogenous regulatory choice," Journal of Public Economics, Elsevier, vol. 55(1), pages 141-162, September.
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  18. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September.
  19. Agnar Sandmo, 2002. "Efficient Environmental Policy with Imperfect Compliance," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(1), pages 85-103, September.
  20. A. Mitchell Polinsky & Steven Shavell, 1990. "Enforcement Costs and the Optimal Magnitude and Probability of Fines," NBER Working Papers 3429, National Bureau of Economic Research, Inc.
  21. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
  22. Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November.
  23. Carlos Chavez & Hugo Salgado, 2005. "Individual Transferable Quota Markets under Illegal Fishing," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(3), pages 303-324, 07.
  24. Stranlund, John K & Chavez, Carlos A, 2000. "Effective Enforcement of a Transferable Emissions Permit System with a Self-Reporting Requirement," Journal of Regulatory Economics, Springer, vol. 18(2), pages 113-31, September.
  25. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  26. Hatcher, Aaron, 2005. "Non-compliance and the quota price in an ITQ fishery," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 427-436, May.
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