IDEAS home Printed from https://ideas.repec.org/p/dre/wpaper/2010-3.html
   My bibliography  Save this paper

An Experimental Analysis of Compliance in Dynamic Emissions Markets

Author

Listed:
  • John K. Stranlund

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

  • James J. Murphy

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

  • John M. Spraggon

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

Abstract

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.

Suggested Citation

  • John K. Stranlund & James J. Murphy & John M. Spraggon, 2010. "An Experimental Analysis of Compliance in Dynamic Emissions Markets," Working Papers 2010-3, University of Massachusetts Amherst, Department of Resource Economics.
    • Handle: RePEc:dre:wpaper:2010-3
    as

    Download full text from publisher

    File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2010-3.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. John K. Stranlund & James J. Murphy & John M. Spraggon, 2013. "Imperfect enforcement of emissions trading and industry welfare: a laboratory investigation," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 9, pages 265-288, Edward Elgar Publishing.
    2. A. Denny Ellerman & Juan-Pablo Montero, 2007. "The Efficiency and Robustness of Allowance Banking in the U.S. Acid Rain Program," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 47-72.
    3. John Stranlund, 2007. "The regulatory choice of noncompliance in emissions trading programs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 38(1), pages 99-117, September.
    4. Malik Arun S., 1993. "Self-Reporting and the Design of Policies for Regulating Stochastic Pollution," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 241-257, May.
    5. Malik, Arun S, 1992. "Enforcement Costs and the Choice of Policy Instruments for Controlling Pollution," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 714-721, October.
    6. Innes, Robert, 2003. "Stochastic pollution, costly sanctions, and optimality of emission permit banking," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 546-568, May.
    7. 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.
    8. Cason, Timothy N. & Gangadharan, Lata, 2006. "Emissions variability in tradable permit markets with imperfect enforcement and banking," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 199-216, October.
    9. Innes, Robert, 2000. "Self-Reporting in Optimal Law Enforcement When Violators Have Heterogeneous Probabilities of Apprehension," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 287-300, January.
    10. Carolos Chavez & John Stanlund, 2003. "Enforcing Transferable Permit Systems in the Presence of Market Power," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(1), pages 65-78, May.
    11. McKenna, C.J. & Livernois, J., 1996. "Truth or Consequences? Enforcing Pollution Standards," Working Papers 1996-7, University of Guelph, Department of Economics and Finance.
    12. 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.
    13. R. Andrew Muller & Stuart Mestelman, 1998. "What have we learned from emissions trading experiments?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 225-238.
    14. Innes, Robert, 1999. "Remediation and self-reporting in optimal law enforcement," Journal of Public Economics, Elsevier, vol. 72(3), pages 379-393, June.
    15. 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, September.
    16. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
    17. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    18. Innes, Robert, 2001. "Violator Avoidance Activities and Self-Reporting in Optimal Law Enforcement," Journal of Law, Economics, and Organization, Oxford University Press, vol. 17(1), pages 239-256, April.
    19. Anderson, Christopher M. & Sutinen, Jon G., 2006. "The effect of initial lease periods on price discovery in laboratory tradable fishing allowance markets," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 164-180, October.
    20. Livernois, John & McKenna, C. J., 1999. "Truth or consequences: Enforcing pollution standards with self-reporting," Journal of Public Economics, Elsevier, vol. 71(3), pages 415-440, March.
    21. van Egteren, Henry & Weber, Marian, 1996. "Marketable Permits, Market Power, and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 161-173, March.
    22. Godby, Robert W. & Mestelman, Stuart & Muller, R. Andrew & Welland, J. Douglas, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain," Journal of Environmental Economics and Management, Elsevier, vol. 32(3), pages 359-381, March.
    23. Murphy, James J. & Stranlund, John K., 2006. "Direct and market effects of enforcing emissions trading programs: An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 217-233, October.
    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 113-131, September.
    25. Torgler, Benno, 2002. " Speaking to Theorists and Searching for Facts: Tax Morale and Tax Compliance in Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 657-683, December.
    26. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
    27. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    28. Kaplow, Louis & Shavell, Steven, 1994. "Optimal Law Enforcement with Self-Reporting of Behavior," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 583-606, June.
    29. 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.
    30. James Alm & Michael McKee, 1998. "Extending the lessons of laboratory experiments on tax compliance to managerial and decision economics," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 259-275.
    31. 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.
    32. Malik, Arun S., 2002. "Further Results on Permit Markets with Market Power and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 371-390, November.
    33. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-189, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2014. "Price controls and banking in emissions trading: An experimental evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 71-86.
    2. Cason, Timothy N., 2010. "What Can Laboratory Experiments Teach Us About Emissions Permit Market Design?," Agricultural and Resource Economics Review, Cambridge University Press, vol. 39(2), pages 151-161, April.
    3. Friesen, Lana & Gangadharan, Lata, 2013. "Designing self-reporting regimes to encourage truth telling: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 90-102.
    4. Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2019. "Cost containment in pollution auctions," Discussion Papers Series 610, School of Economics, University of Queensland, Australia.
    5. David F. Perkis & Timothy N. Cason & Wallace E. Tyner, 2016. "An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 703-718, April.
    6. repec:ags:aareaj:262416 is not listed on IDEAS
    7. Jones, Luke R. & Vossler, Christian A., 2014. "Experimental tests of water quality trading markets," Journal of Environmental Economics and Management, Elsevier, vol. 68(3), pages 449-462.
    8. Tanaka, Kenta & Higashida, Keisaku & Managi, Shunsuke, 2014. "A laboratory assessment of the choice of vessel size under individual transferable quota regimes," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(3), July.
    9. Dormady, Noah C., 2014. "Carbon auctions, energy markets & market power: An experimental analysis," Energy Economics, Elsevier, vol. 44(C), pages 468-482.
    10. Coria, Jessica & Villegas-Palacio, Clara & Cárdenas, Juan Camilo, 2011. "Should we tax or let firms trade emissons? An experimental analysis with policy implications for developing countries," Working Papers in Economics 516, University of Gothenburg, Department of Economics.
    11. Jessica Coria & Clara Villegas-Palacio, 2014. "Regulatory Dealing: Technology Adoption Versus Enforcement Stringency Of Emission Taxes," Contemporary Economic Policy, Western Economic Association International, vol. 32(2), pages 451-473, April.
    12. David McEvoy & Todd Cherry & John Stranlund, 2015. "Endogenous Minimum Participation in International Environmental Agreements: An Experimental Analysis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(4), pages 729-744, December.
    13. Noussair, C.N. & van Soest, D.P., 2014. "Economic Experiments and Environmental Policy : A Review," Discussion Paper 2014-001, Tilburg University, Center for Economic Research.
    14. Todd Cherry & David McEvoy, 2013. "Enforcing Compliance with Environmental Agreements in the Absence of Strong Institutions: An Experimental Analysis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 54(1), pages 63-77, January.
    15. Elmar A. Janssen, 2014. "The Influence of Transparency on Investments in Climate Protecting - An Economic Experiment," Working Papers Dissertations 06, Paderborn University, Faculty of Business Administration and Economics.
    16. Luca Taschini & Marc Chesney & Mei Wang, 2014. "Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies," Journal of Regulatory Economics, Springer, vol. 46(1), pages 23-50, August.
    17. John K. Stranlund & James J. Murphy & John M. Spraggon & Nikolaos Zirogiannis, 2018. "Tying enforcement to prices in emissions markets: An experimental evaluation," Working Papers 2018-05, University of Alaska Anchorage, Department of Economics.
    18. Luengo, Carol & Caffera, Marcelo & Chávez, Carlos, 2018. "Uncertain Penalties and Compliance," MPRA Paper 90945, University Library of Munich, Germany.
    19. 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; laboratory experiments; permit markets; permit banking;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dre:wpaper:2010-3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Eileen Keegan). General contact details of provider: http://edirc.repec.org/data/degraus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.