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A Laboratory Investigation of Compliance Behavior under Tradable Emissions Rights: Implications for Targeted Enforcement

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Author Info
James J. Murphy () (Department of Resource Economics, University of Massachusetts Amherst)
John K. Stranlund () (Department of Resource Economics, University of Massachusetts Amherst)

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Abstract

This paper uses laboratory experiments to test the theoretical observations that both the violations of competitive risk-neutral firms and the marginal effectiveness of increased enforcement across firms are independent of differences in their abatement costs and their initial allocations of permits. This conclusion has important implications for enforcing emissions trading programs because it suggests that regulators have no justification for targeting their enforcement effort based on firm-level characteristics. Consistent with the theory, we find that subjects’ violations were independent of parametric differences in their abatement costs. However, those subjects that were predicted to buy permits tended to have higher violation levels than those who were predicted to sell permits. Despite this, we find no statistically significant evidence that the marginal effectiveness of enforcement depends on any firmspecific characteristic. We also examine the determinants of compliance behavior under fixed emissions standards. As expected, we find significant differences between compliance behavior under fixed standards and emissions trading programs.

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Publisher Info
Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2005-1.

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Length: 42 pages
Date of creation: Feb 2005
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Handle: RePEc:dre:wpaper:2005-1

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Related research
Keywords: enforcement; compliance; emissions trading; permit markets; standards; commandand- control;

Other versions of this item:

Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Cason, Timothy N. & Plott, Charles R., 1996. "EPA's New Emissions Trading Mechanism: A Laboratory Evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 133-160, March. [Downloadable!] (restricted)
  2. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1991. "The Endowment Effect, Loss Aversion, and Status Quo Bias: Anomalies," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter. [Downloadable!] (restricted)
  3. Stranlund, John K & Chavez, Carlos A, 2000. "Effective Enforcement of a Transferable Emissions Permit System with a Self-Reporting Requirement," Journal of Regulatory Economics, Springer, vol. 18(2), pages 113-31, September. [Downloadable!] (restricted)
  4. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley. [Downloadable!]
  5. Timothy N. Cason & Lata Gangadharan, 2004. "Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking," Department of Economics - Working Papers Series 917, The University of Melbourne. [Downloadable!]
    Other versions:
  6. Garvie, Devon & Keeler, Andrew, 1994. "Incomplete enforcement with endogenous regulatory choice," Journal of Public Economics, Elsevier, vol. 55(1), pages 141-162, September. [Downloadable!] (restricted)
    Other versions:
  7. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March. [Downloadable!] (restricted)
  8. James Alm & Michael McKee, 1998. "Extending the lessons of laboratory experiments on tax compliance to managerial and decision economics," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 259-275.
  9. Montero, Juan-Pablo & Sanchez, Jose Miguel & Katz, Ricardo, 2002. "A Market-Based Environmental Policy Experiment in Chile," Journal of Law & Economics, University of Chicago Press, vol. 45(1), pages 267-87, April.
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  10. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September. [Downloadable!] (restricted)
  11. Hahn, Robert W, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 753-65, November. [Downloadable!] (restricted)
    Other versions:
  12. Malik, Arun S., 2002. "Further Results on Permit Markets with Market Power and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 371-390, November. [Downloadable!] (restricted)
  13. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December. [Downloadable!] (restricted)
  14. Hatcher, Aaron, 2005. "Non-compliance and the quota price in an ITQ fishery," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 427-436, May. [Downloadable!] (restricted)
  15. Murphy, James J. & Stranlund, John K., 2006. "Direct and market effects of enforcing emissions trading programs: An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 217-233, October. [Downloadable!] (restricted)
  16. Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November. [Downloadable!] (restricted)
  17. Carolos Chavez & John Stanlund, 2003. "Enforcing Transferable Permit Systems in the Presence of Market Power," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 25(1), pages 65-78, May. [Downloadable!] (restricted)
  18. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March. [Downloadable!] (restricted)
  19. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December. [Downloadable!] (restricted)
  20. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September. [Downloadable!] (restricted)
  21. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
  22. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series 1034, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  23. Cason, Timothy N, 1995. "An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction," American Economic Review, American Economic Association, vol. 85(4), pages 905-22, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John K. Stranlund, 2006. "The Regulatory Choice of Noncompliance in Emissions Trading Programs," Working Papers 2006-7, University of Massachusetts Amherst, Department of Resource Economics. [Downloadable!]
    Other versions:
  2. John K. Stranlund & Wei Zhang, 2008. "Bankruptcy Risk and Imperfectly Enforced Emissions Taxes," Working Papers 2008-3, University of Massachusetts Amherst, Department of Resource Economics. [Downloadable!]
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