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Environmental and Resource Economics

, Volume 50, Issue 4, pp 531–557 | Cite as

The Cost-Effective Choice of Policy Instruments to Cap Aggregate Emissions with Costly Enforcement

  • Marcelo CafferaEmail author
  • Carlos A. Chávez
Article

Abstract

We study the cost-effectiveness of inducing compliance in a program that caps aggregate emissions of a given pollutant from a set of heterogeneous firms based on emissions standards and the relative cost-effectiveness 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 polluters’ abatement costs. Under perfect information we find that (a) the total-cost-effective design of a program based on standards is one in which the standards are firm specific 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 by implementing a system of tradable permits and perfectly enforcing it 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.

Keywords

Environmental policy Cost-effectiveness Enforcement costs Monitoring costs 

JEL Classification

L51 Q28 K32 K42 

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Copyright information

© Springer Science+Business Media B.V. 2011

Authors and Affiliations

  1. 1.Departamento de EconomíaUniversidad de MontevideoMontevideoUruguay
  2. 2.Departamento de EconomíaUniversidad de ConcepciónConcepciónChile

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