Direct and market effects of enforcing emissions trading programs: An experimental analysis

Since firms in an emissions trading program are linked through the permit market, so too are their compliance choices. Thus, enforcement strategies for trading programs must account for the direct effects of enforcement on compliance and emissions decisions as well as the indirect effects that occur due to changes in permit prices. Our experimental results are consistent with theoretical predictions about both a negative direct effect of enforcement on individual violations and a countervailing market effect through the permit price. Furthermore, there is no direct effect of enforcement on the emissions choices of firms, only a negative price effect.