Direct and Market Effects of Enforcing Emissions Trading Programs: An Experimental Analysis

University of Massachusetts, Amherst Resource Economics Working Paper No. 2004-5

37 Pages Posted: 29 Apr 2004

See all articles by James J. Murphy

James J. Murphy

University of Alaska Anchorage

John Stranlund

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

Date Written: April 2004

Abstract

Since firms in an emissions trading program are linked together through a permit market, so too are their compliance choices. Thus, enforcement strategies for trading programs must account for not only the direct effects of enforcement on compliance and emissions decisions, but also the indirect effects that occur because changes in enforcement can induce changes in permit prices. This paper uses laboratory experiments to test for these direct and indirect market effects. Consistent with theoretical predictions, we find a direct effect of enforcement on individual violations, as well as a countervailing market effect through the permit price. Thus, the productivity of increased enforcement pressure to reduce noncompliance is partially offset by a countervailing price effect. Furthermore, there is no direct effect of enforcement on the emissions choices of firms, only a negative price effect. This suggests that the only way increased enforcement can have an impact on environmental quality is if it is large enough and applied widely enough to induce an increase in the equilibrium permit price.

Keywords: laboratory experiments, emissions trading, compliance, enforcement, permits

JEL Classification: C91, L51, Q50

Suggested Citation

Murphy, James J. and Stranlund, John, Direct and Market Effects of Enforcing Emissions Trading Programs: An Experimental Analysis (April 2004). University of Massachusetts, Amherst Resource Economics Working Paper No. 2004-5, Available at SSRN: https://ssrn.com/abstract=536722 or http://dx.doi.org/10.2139/ssrn.536722

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 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)

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