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Enforcement and environmental quality in a decentralized emission trading system

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  • Alessio D’Amato
  • Edilio Valentini

Abstract

This paper addresses the issue of whether the powers of monitoring compliance and allocating tradeable emissions allowances within a federation of countries should be appointed to a unique federal regulator or decentralized to several local regulators. To this end, we develop a two stage game played by environmental regulator(s) and the polluting industries of two countries. Regulator(s) choose the amount of emission allowances to be issued and set the level of monitoring effort to achieve full compliance, while regulated firms choose actual emissions and the number of permits to be held. We identify various, possibly conflicting, spillovers among states in a decentralized setting. We show that cost advantage in favor of local regulators is not sufficient to justify decentralization. Nevertheless, cost differential in monitoring violations can imply lower emissions and greater welfare under a decentralized institutional setting than under a centralized one. However, while a better environmental quality under decentralization is a sufficient condition for higher welfare under the same regime, it is not also a necessary condition.
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Suggested Citation

  • Alessio D’Amato & Edilio Valentini, 2011. "Enforcement and environmental quality in a decentralized emission trading system," Journal of Regulatory Economics, Springer, vol. 40(2), pages 141-159, October.
    • Handle: RePEc:kap:regeco:v:40:y:2011:i:2:p:141-159
    DOI: 10.1007/s11149-011-9153-4
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    Cited by:

    1. Sjöberg, Eric & Xu, Jing, 2018. "An Empirical Study of US Environmental Federalism: RCRA Enforcement From 1998 to 2011," Ecological Economics, Elsevier, vol. 147(C), pages 253-263.
    2. Clò, Stefano & Ferraris, Matteo & Florio, Massimo, 2017. "Ownership and environmental regulation: Evidence from the European electricity industry," Energy Economics, Elsevier, vol. 61(C), pages 298-312.
    3. Tol, Richard S.J., 2017. "The structure of the climate debate," Energy Policy, Elsevier, vol. 104(C), pages 431-438.
    4. Chu‐chuan Cheng & Hsun Chu, 2020. "International emissions trading in a political economy," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 429-446, May.
    5. Sailian Xia & Daming You & Zhihua Tang & Bo Yang, 2021. "Analysis of the Spatial Effect of Fiscal Decentralization and Environmental Decentralization on Carbon Emissions under the Pressure of Officials’ Promotion," Energies, MDPI, vol. 14(7), pages 1-21, March.
    6. Katarina Elofsson, 2011. "Delegation of Decision-Rights for Wetlands," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(2), pages 285-303, October.
    7. Simone Borghesi, 2011. "European Climate Policy: Critical Aspects," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, issue 2, June.

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    More about this item

    Keywords

    Emissions trading; Environmental federalism; Enforcement; Monitoring cost; H70; Q58;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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