Tying enforcement to prices in emissions markets: An experimental evaluation |
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| Institution: | 1. Department of Resource Economics, University of Massachusetts-Amherst, USA;2. Department of Economics, University of Alaska-Anchorage, USA;3. Institute for State Economy, Nankai University, China;4. School of Public and Environmental Affairs, Indiana University-Bloomington, USA;1. Virginia Institute of Marine Science and Texas A&M University, College Station, TX 77843, USA;2. Clark University, 950 Main St., Worcester, MA, 01610, USA;3. Virginia Institute of Marine Science, College of William & Mary, Gloucester Point, VA 23062, USA;4. Monash University, Australia;5. University of Melbourne, Australia;1. School of Environmental and Rural Studies, Pontificia Universidad Javeriana, Colombia;2. Sanford School of Public Policy, Duke University, United States;3. School of Economics and Center for the Study of Security and Drugs (CESED), Universidad de Los Andes, Colombia;1. The World Bank, United States;2. Georgetown University, United States;1. Land Environment Economics & Policy Institute, Department of Economics, University of Exeter, Exeter, EX4 4PU, UK;2. Centre for Social and Economic Research on the Global Environment, School of Environmental Sciences, University of East Anglia, Norwich, NR4 7TJ, UK;3. University of Siena, Department of Political Science and International, Italy;4. Department of Economics and Management, University of Trento, Via Vigilio Inama, 5, 38122, Trento, Italy;1. Department of Agricultural Economics, Sociology, and Education, Pennsylvania State University, USA;2. Department of Economics, Monash University, Australia |
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| Abstract: | We present results from laboratory emissions permit markets designed to investigate the transmission of abatement cost risk to firms' compliance behavior and regulatory enforcement strategies. With a fixed expected marginal penalty, abatement cost shocks produced significant violations and emissions volatility as predicted. Tying the monitoring probability to average permit prices effectively eliminated noncompliance, but transmitted abatement cost risk to monitoring effort. Tying the penalty to average prices reduced violations, but did not eliminate them. Some individuals in these treatments sold permits at low prices, presumably in an attempt to weaken enforcement. While tying sanctions directly to prevailing permit prices has theoretical and practical advantages over tying monitoring to prices, our results suggest that tying sanctions to prices may not be as effective as predicted without additional modifications. |
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| Keywords: | Emissions markets Risk and uncertainty Incomplete information Permit markets Compliance Enforcement Laboratory experiments C91 L51 Q58 |
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