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The Regulatory Choice of Noncompliance in Emissions Trading Programs

John Stranlund ()

No 2006-7, Working Papers from University of Massachusetts Amherst, Department of Resource Economics

Abstract: This paper addresses the following question: To achieve a fixed aggregate emissions target cost-effectively, should emissions trading programs be designed and implemented to achieve full compliance, or does allowing a certain amount of noncompliance reduce the costs of reaching the emissions target? The total costs of achieving the target consist of aggregate abatement costs, monitoring costs, and the expected costs of collecting penalties from noncompliant firms. Under common assumptions, I show that allowing noncompliance is cost-effective only if violations are enforced with an increasing marginal penalty. However, one can design a policy that induces full compliance with a constant marginal penalty that meets the aggregate emissions target at lower expected costs. This last result does not depend on setting an arbitrarily high constant marginal penalty. In fact, the marginal penalty need not be higher than the equilibrium marginal penalty under the policy with the increasing marginal penalty,and can actually be lower. Finally, tying the marginal penalty directly to the permit price allows the policy objective to be achieved without any knowledge of firms’ abatement costs.

Keywords: Compliance; Enforcement; Emissions Trading; Monitoring; Transferable Permits (search for similar items in EconPapers)
JEL-codes: L51 Q28 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-10
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Related works:
Journal Article: The regulatory choice of noncompliance in emissions trading programs (2007) Downloads
Working Paper: The Regulatory Choice of Noncompliance in Emissions Trading Programs (2006) Downloads
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