Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation

This paper uses laboratory experiments to investigate the performance of emission permit markets when compliance is imperfectly enforced. In particular we examine deviations in observed aggregate payoffs and expected penalties from those derived from a model of risk-neutral payoff-maximizing firms. We find that the experimental emissions markets were reasonably efficient at allocating individual emission control choices despite imperfect enforcement and significant noncompliance. However, violations and expected penalties were lower than predicted when these are predicted to be high, but were about the same as predicted values when these values were predicted to be low. Thus, although a standard model of compliance with emissions trading programs tends to predict significantly higher violations than we observe when subjects have strong incentives to violate their emissions permits, individual emissions control responsibilities are distributed among firms as predicted.


Issue Date:
2008-07
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/42124
Total Pages:
33
JEL Codes:
C91; L51; Q58
Series Statement:
Working Paper
2008-1




 Record created 2017-04-01, last modified 2017-08-25

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