Policing carbon markets

Calel, Raphael, Dechezlepretre, Antoine and Venmans, Frank ORCID: 0000-0002-4264-6606 (2025) Policing carbon markets. Climate Policy. ISSN 1469-3062

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Abstract

Carbon markets have emerged in recent decades as one of the most important tools for curbing industrial greenhouse gas emissions, but they present a number of novel enforcement challenges as compared to more conventional pollution regulations. To shed light on the practical issues involved in policing carbon markets, this study presents the first comprehensive analysis of the EU Emissions Trading System, a single programme that was policed by up to 31 different national regulators. Since 2006, 98.8% of installations in the EU ETS have complied with the regulation according to official data. The observed non-compliance should have resulted in €13 billion in total fines, but only €2.1 billion appear to have been collected. More generally, variation in the probability and severity of fines across national jurisdictions and time explain just one-tenth of the variation in compliance rates. This pattern of high rates of compliance coupled with low rates of enforcement is known in the literature as ‘Harrington’s paradox’. Meanwhile, other enforcement strategies that have been pointed to as resolutions to Harrington’s paradox in other applications, such as ‘naming and shaming’, appear to have had little discernible effect. Therefore, resolving Harrington’s paradox in the context of cap and trade regulation remains a fruitful area for future research.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Grantham Research Institute
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences S Agriculture
JEL classification:	Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q50 - General Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C14 - Semiparametric and Nonparametric Methods
Date Deposited:	11 Feb 2025 14:15
Last Modified:	26 Mar 2025 17:03
URI:	http://eprints.lse.ac.uk/id/eprint/127242

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