Should we tax or let firms trade emissons? An experimental analysis with policy implications for developing countries

Jessica Coria, Clara Villegas-Palacio and Juan-Camilo Cardenas

No 516, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: In this paper we use laboratory experiments to test the theoretical predictions derived by Villegas-Palacio and Coria (2010) about the effects of the interaction between technology adoption and incomplete enforcement. They show that under Tradable Emissions Permits (TEPs), and in contrast to taxes, the fall in permit price produced by adoption of environmentally friendly technologies reduces the benefits of violating the environmental regulation at the margin and leads firms to improve their compliance behavior. Moreover, when TEPs are used, the regulator can speed up the diffusion of new technologies since the benefits from adopting the new technology increase with the enforcement stringency.

Our experimental results confirm these theoretical predictions. While the aggregate emissions do not statistically differ between the two policy instruments, the fraction of firms violating the regulation and the aggregate extent of violation are lower under TEPs than under emission taxes regardless of the monitoring probability. Hence, in contrast to previous studies, our results indicate that TEPs would appear to be a feasible policy alternative in weak regulatory contexts.

Keywords: laboratory experiments; emission taxes; auctioned tradable emissions permits; imperfect monitoring; technology adoption; developing countries (search for similar items in EconPapers)
JEL-codes: C91 L51 Q58 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-11-22
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Citations: View citations in EconPapers (1)

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