Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation
University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics
James J. Murphy
University of Alaska Anchorage
affiliation not provided to SSRN
July 21, 2008
University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2008-1
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.
Number of Pages in PDF File: 33
Keywords: enforcement, compliance, emissions trading, permit markets, pollution, laboratory experiments
JEL Classification: C91, L51, Q58working papers series
Date posted: July 25, 2008
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