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Emission trading: Participation enforcement determines the need for compliance enforcement

Stine Aakre, Jon Hovi

We identify and explain significant differences between the compliance enforcement systems of three cap-and-trade programmes: the European Union’s Emission Trading Scheme (EU-ETS), the US SO2 emission trading programme and the Kyoto Protocol. Because EU-ETS’s compliance enforcement system is somewhat less potent than that of US SO2, but vastly more potent than Kyoto’s, it might be tempting to predict that EU-ETS will (1) not quite achieve the SO2 programme’s near-perfect compliance rates, yet (2) achieve significantly better compliance rates than Kyoto. However, we offer a novel theoretical framework suggesting that how compliance enforcement affects compliance will depend on how the emission trading programme addresses participation. We conclude that while (1) will likely prove correct, (2) will not; Kyoto may even outperform EU-ETS compliance-wise because whereas EU-ETS (and US SO2) specify mandatory participation, most Kyoto member countries participate voluntarily.

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