Enforcement and environmental quality in a decentralized emission trading system

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 em...

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Bibliographic Details
Published in:Journal of regulatory economics 2011-10, Vol.40 (2), p.141-159
Main Authors: D’Amato, Alessio, Valentini, Edilio
Format: Article
Language:English
Subjects:
Allocative efficiency
Asymmetry
Carbon emissions
Compliance
Cost analysis
Decentralization
Economic theory
Economics
Economics and Finance
Emissions trading
Enforcement
Environmental economics
Environmental monitoring
Environmental policy
Environmental quality
Environmental regulations
Game theory
Industrial Organization
Investigations
Microeconomics
Monitoring
Original Article
Pollution
Public Finance
Spillovers
Studies
Supranationalism
Systems analysis
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Summary: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.
ISSN:0922-680X
1573-0468
DOI:10.1007/s11149-011-9153-4