Emissions trading, non-compliance and bankable permits

Abstract

We study non-compliance in an emissions trading system in which firms may bank and borrow permits. We find a condition involving subjective auditing probability that characterizes compliance and allows us to analyze the time paths of actual emissions, reported emissions and violations. We find two interesting time instants. At the first time instant, reported emissions begin to be lower than the actual emissions, and at the second time instant, the reported emissions become zero and the actual emissions become constant. The results indicate, among other things, that a given penalty scheme may fail to induce compliance over the whole planning interval, even though it achieves compliance over the initial stage.

Optimal Pollution Standards and Non-compliance in a Dynamic Framework

“…In consequence, the best option for the society would be to penalize as much as possible, 32 We have numerically computed a rise in the maximum value of V R (k 0 ) when switching from f = 10 12 to f = 10 13 . Interestingly, the value of β that maximizes social welfare when the severity of the fine tends to infinity converges to a strictly positive finite value,β.…”