Can Affirmative Motivations Improve Compliance in Emissions Trading

Early emissions trading programs obtained a very high rate of compliance, in part through a system of continuous emissions monitoring systems (CEMS). As they expand into a wider range of pollutants and sources, however, emissions trading programs will no longer be able to rely entirely, or even primarily, on CEMS. Instead, policy designers will have to rely on different forms of self-reporting, as was done in the early stages of the EU Emissions Trading System and as is common in many other forms of environmental and regulatory compliance, including taxation policy. The cost of verifying these self-reports is an important concern, one directly related to the likelihood of non-compliance. This paper asks if by improving “affirmative motivations” (Tyler 2006; May 2005) for compliance among emitters, such policies could reduce under-reporting and thus the frequency of required audits to verify self-reported emissions information, thereby reducing program costs without unduly jeopardizing environmental integrity. Using a computerized laboratory emissions trading market, we find that many subjects reported honestly in situations where dishonest reporting was obviously more profitable, as well as a statistically significant association between perceptions of a policy’s fairness and legitimacy with more honest levels of emissions reporting. These results suggest that designing an emissions trading program to increase its perceived legitimacy and fairness among users has the potential to increase honest emissions reporting and thereby lower monitoring costs for programs where continuous emissions monitors (CEMS) are not possible or practical.