A Laboratory Investigation of Compliance Behavior under Tradable Emissions Rights: Implications for Targeted Enforcement

This paper uses laboratory experiments to test theoretical predictions concerning compliance behavior in competitive emissions trading programs. We test the hypotheses that both the violations of competitive risk neutral firms and the marginal effectiveness of increased enforcement across firms are independent of differences in their benefits from emissions (abatement costs) and their initial permit allocations. This conclusion suggests that regulators have no conceptual justification for targeting their enforcement effort based on firm-level characteristics. Consistent with theory, we find that violations were independent of parametric differences in emissions benefits. However, subjects who were predicted to buy permits tended to have higher violation levels than those who were predicted to be sellers. Nevertheless, we find no evidence that the marginal effectiveness of enforcement depends on any firm-specific characteristic. We also examine the determinants of compliance behavior under fixed emissions standards. As expected, we find significant differences between compliance behavior under fixed standards and emissions trading programs.