Grantee Research Project Results
2003 Progress Report: An Investigation of Compliance Behavior and Enforcement of Emissions Trading Programs Using Experimental Analyses
EPA Grant Number: R829608Title: An Investigation of Compliance Behavior and Enforcement of Emissions Trading Programs Using Experimental Analyses
Investigators: Murphy, James , Stranlund, John
Institution: University of Massachusetts - Amherst
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2002 through December 31, 2003 (Extended to April 28, 2005)
Project Period Covered by this Report: January 1, 2003 through December 31, 2004
Project Amount: $227,860
RFA: Market Mechanisms and Incentives for Environmental Management (2001) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
Although there is a substantial body of economic theory about compliance and enforcement in emissions trading programs and readily available information about how existing emissions trading programs are enforced, there are no empirical analyses of the determinants of compliance decisions in emissions trading programs. Furthermore, there are no empirical analyses of the various elements of actual or proposed enforcement designs. Toward filling these gaps, the objective of this research project is to design and conduct laboratory experiments to test a number of hypotheses about compliance behavior and enforcement strategies for emissions trading programs.
Progress Summary:
The first round of experiments has been completed. These experiments were designed to test some basic hypotheses about enforcement and compliance behavior when emissions permits are tradable. Some key results that have emerged include:
- Consistent with theoretical predictions, unlike the case of fixed standards, when permits are tradable, individual violations are independent of a firm’s marginal abatement costs. Contrary to our hypothesis, however, violations appear to depend on initial permit allocations. Specifically, those firms that are permit sellers in the market tend to retain more permits, emit slightly more, and have slightly fewer violations than predicted. Conversely, permit buyers tend to hold fewer permits, emit less, and violate slightly more than predicted. Combined, these results suggest that directing higher enforcement pressure on a particular industry or group of firms based on abatement costs may not be necessary. Whether a firm is buying or selling permits, however, may be a better indication of the likelihood of noncompliance.
- Changes in enforcement can have both direct effects and indirect price effects on emissions and compliance decisions. Because firms in an emissions trading program are linked together through a permit market, so too are their compliance choices. Thus, enforcement strategies for trading programs must account not only for the direct effects of enforcement on compliance and emissions decisions, but also the indirect effects that occur because changes in enforcement can induce changes in permit prices. This research project uses laboratory experiments to test for these direct and indirect market effects. Consistent with theoretical predictions, we find a direct effect of enforcement on individual violations, as well as a countervailing market effect through the permit price. Thus, the productivity of increased enforcement pressure to reduce noncompliance is offset partially by an increase in the price of emissions permits. Furthermore, there is no direct effect of enforcement on the emissions choices of firms, only a negative price effect. This suggests that the only way increased enforcement can have an impact on environmental quality is if it is large enough and applied widely enough to induce an increase in the equilibrium permit price.
We also have designed and conducted experiments to test hypotheses about enforcement and compliance behavior when firms self-report emissions (and therefore violations) and can engage in avoidance activities that reduce the likelihood that violations will be discovered. During the coming year, we will analyze these data.
Future Activities:
We will complete three papers for submission to leading journals based on the data collected in the first round of experiments during the coming year. The first paper, which is nearing completion and will be submitted to the Journal of Economic Behavior and Organization within 2 months, focuses on the direct and indirect effects of enforcement as discussed in the progress summary above. The second paper, which will probably be submitted to the Journal of Environmental Economics and Management, focuses on the first bullet point above regarding hypotheses about auditing (or targeting) certain firms more frequently than others. The last paper will contain a welfare comparison of tradable permit programs with fixed standards. We also will begin the analysis of self-reporting and avoidance data that were collected in the second series of experiments.
Journal Articles:
No journal articles submitted with this report: View all 22 publications for this projectSupplemental Keywords:
permit allocations, Economic, Social, and Behavioral Science Research Program, economics and business, market mechanisms, social science, allowance allocation, allowance market performance, compliance behavior, decisionmaking, effects of policy instruments, emissions trading, enforcement and compliance, environmental economics, financial mechanisms, impact of federal policy instruments, incentives, liability rules, market incentives, market-based mechanisms, marketable permits, policy incentives, policy instruments, policymaking, pollution fees, socioeconomics,, RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics and Business, Market mechanisms, Social Science, market incentives, policy instruments, effects of policy instruments, financial mechanisms, market-based mechanisms, compliance behavior, impact of federal policy instruments, policy incentives, policy making, decision making, incentives, socioeconomics, enforcement and compliance, cap and trade systems, environmental impact fees, pollution fees, tradeable permits, allowance allocation, allowance market performance, marketable permitsRelevant Websites:
http://www.umass.edu/resec/faculty/murphy/research.html Exit
Progress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.