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Tying enforcement to prices in emissions markets: An experimental evaluation

Author

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  • Stranlund, John K.
  • Murphy, James J.
  • Spraggon, John M.
  • Zirogiannis, Nikolaos

Abstract

We present results from laboratory emissions permit markets designed to investigate the transmission of abatement cost risk to firms' compliance behavior and regulatory enforcement strategies. With a fixed expected marginal penalty, abatement cost shocks produced significant violations and emissions volatility as predicted. Tying the monitoring probability to average permit prices effectively eliminated noncompliance, but transmitted abatement cost risk to monitoring effort. Tying the penalty to average prices reduced violations, but did not eliminate them. Some individuals in these treatments sold permits at low prices, presumably in an attempt to weaken enforcement. While tying sanctions directly to prevailing permit prices has theoretical and practical advantages over tying monitoring to prices, our results suggest that tying sanctions to prices may not be as effective as predicted without additional modifications.

Suggested Citation

  • Stranlund, John K. & Murphy, James J. & Spraggon, John M. & Zirogiannis, Nikolaos, 2019. "Tying enforcement to prices in emissions markets: An experimental evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:jeeman:v:98:y:2019:i:c:s0095069618304613
    DOI: 10.1016/j.jeem.2019.07.001
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    2. Dongmin Kong & Ling Zhu, 2022. "Governments’ Fiscal Squeeze and Firms’ Pollution Emissions: Evidence from a Natural Experiment in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 81(4), pages 833-866, April.

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    More about this item

    Keywords

    Emissions markets; Risk and uncertainty; Incomplete information; Permit markets; Compliance; Enforcement; Laboratory experiments;
    All these keywords.

    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

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