The cost-effective choice of policy instruments to cap aggregate emissions with costly enforcement

Caffera, Marcelo; Chávez, Carlos

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Autor/es

Caffera, Marcelo ; Chávez, Carlos

Editor

Springer

Fecha

2011

Extensión

pp. 531-557

Abstract

We study the cost-e§ectiveness of inducing compliance in a program that caps aggregate emissions of a given pollutant from a set of heterogeneous Örms based on emissions standards and the relative cost-e§ectiveness of such a program with respect to an optimally designed program based on tradable discharge permits. Our analysis considers abatement, monitoring and sanctioning costs, as well as perfect and imperfect information on the part of the regulator with regard to the pollutersí abatement costs. Under perfect information we Önd that (a) the total cost-e§ective design of a program based on standards is one in which the standards are Örm speciÖc and perfectly enforced, and (b) the total cost of an optimally designed program based on standards is lower than the total cost of an optimally designed transferable emission permits system, except under special conditions. This is true when it is optimum to induce perfect compliance and when it is not. Under imperfect information, nevertheless, it is only with a system of tradable permits that is perfectly enforced with a constant marginal penalty tied to the price of the permits that the regulator can surmount the informational problem and at the same time minimize the total cost of the program with certainty.