Tying enforcement to prices in emissions markets: An experimental evaluation

John Stranlund (), James Murphy, John M. Spraggon and Nikolaos Zirogiannis

Journal of Environmental Economics and Management, 2019, vol. 98, issue C

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.

Keywords: Emissions markets; Risk and uncertainty; Incomplete information; Permit markets; Compliance; Enforcement; Laboratory experiments (search for similar items in EconPapers)
JEL-codes: C91 L51 Q58 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Tying enforcement to prices in emissions markets: An experimental evaluation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:98:y:2019:i:c:s0095069618304613

DOI: 10.1016/j.jeem.2019.07.001

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