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Should we tax or let firms trade emissons? An experimental analysis with policy implications for developing countries

  • Coria, Jessica

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Villegas-Palacio, Clara

    ()

    (Facultad de Minas, Universidad Nacional de Colombia - Sede Medellin)

  • Cárdenas, Juan Camilo

    ()

    (Dept of Economics, Universidad de los Andes, Colombia)

In this paper we use laboratory experiments to test the theoretical predictions derived by Villegas-Palacio and Coria (2010) about the effects of the interaction between technology adoption and incomplete enforcement. They show that under Tradable Emissions Permits (TEPs), and in contrast to taxes, the fall in permit price produced by adoption of environmentally friendly technologies reduces the benefits of violating the environmental regulation at the margin and leads firms to improve their compliance behavior. Moreover, when TEPs are used, the regulator can speed up the diffusion of new technologies since the benefits from adopting the new technology increase with the enforcement stringency. Our experimental results confirm these theoretical predictions. While the aggregate emissions do not statistically differ between the two policy instruments, the fraction of firms violating the regulation and the aggregate extent of violation are lower under TEPs than under emission taxes regardless of the monitoring probability. Hence, in contrast to previous studies, our results indicate that TEPs would appear to be a feasible policy alternative in weak regulatory contexts.

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File URL: http://hdl.handle.net/2077/28008
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 516.

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Length: 38 pages
Date of creation: 22 Nov 2011
Date of revision:
Handle: RePEc:hhs:gunwpe:0516
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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  1. 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.
  2. Lata Gangadharan & Rachel Croson & Alex Farrell, 2013. "Investment decisions and emissions reductions: results from experiments in emissions trading," Chapters, in: Handbook on Experimental Economics and the Environment, chapter 8, pages 233-264 Edward Elgar.
  3. Requate, Till & Unold, Wolfram, 2003. "Environmental policy incentives to adopt advanced abatement technology:: Will the true ranking please stand up?," European Economic Review, Elsevier, vol. 47(1), pages 125-146, February.
  4. 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.
  5. Coria, Jessica, 2009. "Taxes, permits, and the diffusion of a new technology," Resource and Energy Economics, Elsevier, vol. 31(4), pages 249-271, November.
  6. Inés Macho-Stadler & David Pérez-Castrillo, 2004. "Optimal Enforcement Policy and Firms' Emissions and Compliance with Environmental Taxes," UFAE and IAE Working Papers 612.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. Coria, Jessica & Sterner, Thomas, 2008. "Tradable Permits in Developing Countries: Evidence from Air Pollution in Santiago, Chile," Discussion Papers dp-08-51, Resources For the Future.
  8. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  9. 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.
  10. Clara Villegas-Palacio & Jessica Coria, 2010. "On the interaction between imperfect compliance and technology adoption: taxes versus tradable emissions permits," Journal of Regulatory Economics, Springer, vol. 38(3), pages 274-291, December.
  11. 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 714-21, October.
  12. 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.
  13. James J. Murphy & John K. Stranlund, 2005. "A Laboratory Investigation of Compliance Behavior under Tradable Emissions Rights: Implications for Targeted Enforcement," Working Papers 2005-1, University of Massachusetts Amherst, Department of Resource Economics.
  14. 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.
  15. Blackman, Allen & Harrington, Winston, 1999. "The Use of Economic Incentives in Developing Countries: Lessons from International Experience with Industrial Air Pollution," Discussion Papers dp-99-39, Resources For the Future.
  16. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu & Wang, Hua, 2001. "Inspections, pollution prices, and environmental performance: evidence from China," Ecological Economics, Elsevier, vol. 36(3), pages 487-498, March.
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