Putting Persuasion Back in the Equation: Compliance in Cap and Trade Programs

Abstract:     
This article analyzes the differences in the meaning and significance of "compliance" in traditional "command and control" regulation and "cap and trade" regulation. Unlike traditional regulatory programs, cap and trade programs are often able to boast of 100% compliance rates. Yet, the meaning and significance of compliance in the two types of regulatory programs differ substantially. In traditional regulation, compliance was a discretion-laden judgment by regulators about a company's environmental performance or its good faith efforts to improve its environmental performance. In cap and trade regulation, compliance is an objective determination that does not rely on information about the environmental behavior of a company.

The article argues that this redefinition of compliance implies both a gain and a loss in terms of environmental policy outcomes. On one hand, cap and trade programs involve less conflict between regulators and regulated companies with respect to how companies should reduce their emissions. On the other hand, cap and trade programs entail the curtailment of negotiation and persuasion-based social relationships between regulators and companies that have resulted in large environmental gains in the past. Indeed, while cap and trade programs are widely viewed as efficient, they are subject to criticism for being less reliable than traditional regulation. While some cap and trade programs may be adequately designed such that the market incentives provided by the program promote the desired emissions reductions, others may not. The article advocates the use of compliance plans within cap and trade programs to bring persuasion back into the "compliance equation" and enhance program reliability.

Number of Pages in PDF File: 45

Keywords: environmental law, regulatory governance, market-based regulation, can and trade, compliance, enforcement

JEL Classification: K32

Accepted Paper Series