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Tying enforcement to prices in emissions markets: An experimental evaluation

John Stranlund, James Murphy, John Spraggon () and Nikolaos Zirogiannis
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John Stranlund: University of Massachusetts Amherst
Nikolaos Zirogiannis: Indiana University Bloomington

No 2018-05, Working Papers from University of Alaska Anchorage, Department of Economics

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 this strategy may not be as effective as predicted without additional modifications.

Keywords: experimental economics; Emissions markets; risk and uncertainty; incomplete information; permit markets; compliance; enforcement; laboratory experiments. (search for similar items in EconPapers)
JEL-codes: C92 L51 Q58 D62 H23 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ene, nep-env, nep-exp, nep-ore, nep-reg and nep-res
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Published in Journal of Environmental Economics and Management. Nov 2019.

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