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Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation

Author

Listed:
  • John K. Stranlund

    (Department of Resource Economics, University of Massachusetts Amherst)

  • James J. Murphy

    (Department of Economics, University of Alaska Anchorage, Anchorage, Alaska)

  • John M. Spraggon

    (Department of Resource Economics, University of Massachusetts Amherst)

Abstract

This paper uses laboratory experiments to investigate the performance of emission permit markets when compliance is imperfectly enforced. In particular we examine deviations in observed aggregate payoffs and expected penalties from those derived from a model of risk-neutral payoff-maximizing firms. We find that the experimental emissions markets were reasonably efficient at allocating individual emission control choices despite imperfect enforcement and significant noncompliance. However, violations and expected penalties were lower than predicted when these are predicted to be high, but were about the same as predicted values when these values were predicted to be low. Thus, although a standard model of compliance with emissions trading programs tends to predict significantly higher violations than we observe when subjects have strong incentives to violate their emissions permits, individual emissions control responsibilities are distributed among firms as predicted.

Suggested Citation

  • John K. Stranlund & James J. Murphy & John M. Spraggon, 2008. "Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation," Working Papers 2008-1, University of Massachusetts Amherst, Department of Resource Economics.
    • Handle: RePEc:dre:wpaper:2008-1
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    File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2008-1.pdf
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    Cited by:

    1. Carol Luengo & Marcelo Caffera & Carlos Ch vez, 2014. "Uncertain Penalties and Compliance," Documentos de Trabajo/Working Papers 1407, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    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. Stranlund, John K. & Murphy, James J. & Spraggon, John M. & Zirogiannis, Nikolaos, 2019. "Tying enforcement to prices in emissions markets: An experimental evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    4. Carol Luengo & Marcelo Caffera & Carlos Chávez, 2020. "Uncertain penalties and compliance: experimental evidence," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 22(2), pages 197-216, April.
    5. Timothy N. Cason & Lana Friesen & Lata Gangadharan, 2021. "Complying with environmental regulations: experimental evidence," Chapters, in: Ananish Chaudhuri (ed.), A Research Agenda for Experimental Economics, chapter 4, pages 69-92, Edward Elgar Publishing.

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    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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