Abstract
Should the powers of monitoring compliance and allocating tradeable emissions allowances be appointed to a unique supranational regulator or decentralized to several local regulators? To answer this question, we develop a two stage-two country game where environmental regulators set the amount of emission allowances and the level of monitoring effort to achieve full compliance while the regulated firms choose actual emissions and the number of permits to be held. Various, possibly conflicting, spillovers between countries arise in a decentralized setting. We show that decentralization is socially harmful if no asymmetry among institutional settings is introduced and can be suboptimal even when decentralization features lower monitoring costs than a centralized setting. Lower monitoring costs are therefore necessary, but not sufficient, to justify decentralization. Also, our analysis reveals that welfare can be higher under decentralization even if the corresponding environmental quality is worse than under centralization. Indeed, better environmental quality is sufficient but not necessary for higher welfare under decentralization. Finally, we discuss how these results can provide a theoretical rationale for the recent evolution of the EU ETS design.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Barrett S. (1994) Strategic environmental policy and international trade. Journal of Public Economics 54: 325–338
Butler H. N., Macey J. R. (1996) Using federalism to improve environmental policy. American Enterprise Institute, Washington, DC
Chavez C., Stranlund J. K. (2003) Enforcing transferable emission permit systems in the presence of market power. Environmental and Resource Economics 25: 65–78
D’Amato, A., & Valentini, E. (2009). A note on international emissions trading with endogenous allowance choices, mimeo. A preliminary version circulated as Why so many tradeable emission permits within the European Union?, I-Com Working Paper, 11/07, Istituto per la Competitività, Roma.
Ellerman A. D. (2008) Lessons et al., for the United States from the European Union’s CO 2 emissions trading scheme. In: Ellerman A. D. (eds) Cap-and-trade: Contributions to the design of a U.S. greenhouse gas program. MIT Center for Energy and Environmental Policy Research, Cambridge, MA
Ellerman D., Buchner B. (2008) Over-allocation or abatement? A preliminary analysis of the EU emissions trading scheme based on the 2005–06 emissions data. Environmental and Resource Economics 41: 267–287
European Commission. (2006). Report to the European parliament and the council considering the functioning of the EU emissions trading scheme. COM(2006)676.
European Commission. (2008). Proposal for a directive of the European parliament and of the council amending directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community. COM(2008)16 final 2008/0013 (COD).
Helm C. (2003) International emissions trading with endogenous allowance choices. Journal of Public Economics 87: 2737–2747
Keeler A. (1991) Noncompliant firms in transferable discharge permit markets: Some extension. Journal of Environmental Economics and Management 21: 180–189
Kruger J., Oates W. E., Pizer W. A. (2007) Decentralization in the EU emissions trading scheme and lessons for global policy. Review of Environmental Economics and Policy 1: 66–87
Malik A. (1990) Markets for pollution control when firms are noncompliant. Journal of Environmental Economics and Management 18: 97–106
Malik A. (1992) Enforcement cost and the choice of policy instruments for controlling pollution. Economic Inquiry 30: 714–721
Murphy J. J., Stranlund J. K. (2006) Direct and market effects of enforcing emissions trading programs: An experimental analysis. Journal of Economic Behaviour and Organization 61: 217–233
Oates W. E. (1999) An essay on fiscal federalism. Journal of Economic Literature 37: 1120–1149
Sigman, H. (2010). Monitoring and enforcement of climate policy. NBER WP 16121, June 2010, and forthcoming in Fullerton D., & Wolfram C. (Eds.), The design and implementation of U.S. climate policy, NBER.
Silva E. C. D., Zhu X. (2008) Global trading of carbon dioxide permits with noncompliant polluters. International Tax and Public Finance 15: 430–459
Stranlund J. K. (2007) The regulatory choice of noncompliance in emissions trading programs. Environmental and Resource Economics 38: 99–117
Stranlund J. K., Chavez C. A. (2000) Effective enforcement of a transferable emissions permit system with a self-reporting requirement. Journal of Regulatory Economics 18: 113–131
Stranlund J. K., Costello C., Chavez C. A. (2005) Enforcing emissions trading when emissions permits are bankable. Journal of Regulatory Economics 28: 181–204
Stranlund J. K., Dhanda K. (1999) Endogenous monitoring and enforcement of a transferable emissions permit system. Journal of Environmental Economics and Management 38: 267–282
Svendsen G. T. (1998) The US acid rain program: Design, performance and assessment. Environment and Planning C: Government and Policy 16: 723–734
Ulph A. (1996) Environmental policy and international trade when governments and producers act strategically. Journal of Environmental Economics and Management 30: 265–281
Ulph A. (1998) Political institutions and the design of environmental policy in a federal system with asymmetric information. European Economic Review 42: 583–592
Ulph A. (2000) Armonization and optimal environmental policy in a federal system with asymmetric information. Journal of Environmental Economics and Management 39: 224–241
van Egteren H., Weber M. (1996) Marketable permits, market power, and cheating. Journal of Environmental Economics and Management 30: 161–173
Zapfel P. (2007) A brief but lively chapter in EU climate policy: The Commission’s perspective. In: Ellerman A. D. (eds) Allocation in the European emission trading scheme. rights, rents and fairness. Cambridge University Press, New York
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
D’Amato, A., Valentini, E. Enforcement and environmental quality in a decentralized emission trading system. J Regul Econ 40, 141–159 (2011). https://doi.org/10.1007/s11149-011-9153-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11149-011-9153-4