Enforcing Transferable Permit Systems in the Presence of Transaction Costs

Chávez, Carlos; Stranlund, John K.

doi:10.2139/ssrn.529682

Cited by 23 publications

(25 citation statements)

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“…Others restrict their analyses to full-compliance outcomes (Malik 1992;Stranlund and Chavez 2000;Chavez and Stranlund 2003). In practice we find examples of emissions trading programs with significant noncompliance as well as examples with near-perfect compliance.…”

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confidence: 84%

The regulatory choice of noncompliance in emissions trading programs

Stranlund

2006

Environ Resource Econ

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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 with 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.

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confidence: 84%

The regulatory choice of noncompliance in emissions trading programs

Stranlund

2006

Environ Resource Econ

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“…Within the context of designing market-based pollution control policies, several authors have provided theoretical analyses of compliance incentives, the consequences of noncompliance, and the design of enforcement strategies (e.g., Keeler 1991, Malik 1990, 1992, vanEgteren and Weber 1996, Stranlund and Dhanda 1999, Stranlund and Chavez 2000, Chavez and Stranlund 2003, Stranlund, Costello and Chavez 2005. Taken as a whole, this literature suggests that firms' incentives toward noncompliance under market-based regulations, as well as the design of enforcement strategies to counteract these incentives, are quite different from compliance and enforcement of other policy instruments, particularly command-andcontrol regulations.…”

Section: Introductionmentioning

confidence: 99%

Risk aversion and compliance in markets for pollution control

Stranlund

2008

Journal of Environmental Management

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Abstract:This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm's decision to be compliant or not is independent of its manager's risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers' utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations. 1 Risk Aversion and Compliance in Markets for Pollution ControlAbstract: This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm's decision to be compliant or not is independent of its manager's risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers' utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations.

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“…Hahn (1984) illustrated how market power in a static tradeable quota system gives potential for efficiency losses if the allocations are other than what the agents would hold in equilibrium. Van Egteren and Weber (1996) and Chavez and Stranlund (2003) show in static models how enforcement may mitigate Hahn's results. Cronshaw and Kruse (1996) describe a discrete time model with the possibility of banking quota.…”

Section: Ptmentioning

confidence: 99%

Using history dependence to design a dynamic tradeable quota system under market imperfections

Armstrong

2007

Environ Resource Econ

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A transferable quota system is analysed in a two-period model with market power. So far, the management mechanisms presented in the literature to remedy market power have either not succeeded in securing efficiency in the distribution of quota within and across time periods, or have resulted in only one of the two inefficiencies being eliminated. In this paper a new mechanism is introduced where allocation of quota is made dependent upon historic quota acquisitions. This opens for a trade-off between distributional and time efficiency, or under specific circumstances securing overall efficiency.

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Enforcing Transferable Permit Systems in the Presence of Transaction Costs

Cited by 23 publications

References 0 publications

The regulatory choice of noncompliance in emissions trading programs

The regulatory choice of noncompliance in emissions trading programs

Risk aversion and compliance in markets for pollution control

Using history dependence to design a dynamic tradeable quota system under market imperfections

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