Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation

University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2008-1

33 Pages Posted: 25 Jul 2008

See all articles by John Stranlund

John Stranlund

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

James J. Murphy

University of Alaska Anchorage

John Spraggon

affiliation not provided to SSRN

Date Written: July 21, 2008

Abstract

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.

Keywords: enforcement, compliance, emissions trading, permit markets, pollution, laboratory experiments

JEL Classification: C91, L51, Q58

Suggested Citation

Stranlund, John and Murphy, James J. and Spraggon, John, Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation (July 21, 2008). University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2008-1, Available at SSRN: https://ssrn.com/abstract=1166142 or http://dx.doi.org/10.2139/ssrn.1166142

John Stranlund

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States
413-545-6328 (Phone)

James J. Murphy (Contact Author)

University of Alaska Anchorage ( email )

Anchorage, AK
United States
907-786-1936 (Phone)

HOME PAGE: http://faculty.cbpp.uaa.alaska.edu/jmurphy/

John Spraggon

affiliation not provided to SSRN ( email )

No Address Available

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