FEEM working papers "Note di lavoro" series
2008 .097

Enforcement and Environmental Quality in a Decentralized Emission Trading System


Authors: Alessio D'Amato, Edilio Valentini
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Emissions Trading,Environmental Federalism,Enforcement,Monitoring Cost
JEL n.: F18,K42,Q53
JEL: Journal of Regulatory Economics
Pages: Vol. 40, No. 2, pages 141-159
Date: 10/2011

Abstract

This paper addresses the issue of whether the powers of monitoring compliance and allocating tradeable emissions allowances within a federation of countries should be appointed to a unique federal regulator or decentralized to several local regulators. To this end, we develop a two stage game played by environmental regulator(s) and the polluting industries of two countries. Regulator(s) choose the amount of emission allowances to be issued and set the level of monitoring effort to achieve full compliance, while regulated firms choose actual emissions and the number of permits to be held. We identify various, possibly conflicting, spillovers among states in a decentralized setting. We show that cost advantage in favor of local regulators is not sufficient to justify decentralization. Nevertheless, cost differential in monitoring violations can imply lower emissions and greater welfare under a decentralized institutional setting than under a centralized one. However, while a better environmental quality under decentralization is a sufficient condition for higher welfare under the same regime, it is not also a necessary condition.

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Suggested citation: Alessio D'Amato and Edilio Valentini, 2011. "Enforcement and environmental quality in a decentralized emission trading system," Journal of Regulatory Economics, Springer, vol. 40(2), pages 141-159, October,
http://dx.doi.org/10.1007/s11149-011-9153-4

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