This project uses climate change policy in the U.S. and EU and focuses upon three questions to examine the effectiveness and efficiency of mandated regulatory and voluntary changes in firm behavior. First, have two voluntary cap-and-trade programs, the Chicago Climate Exchange and the Carbon Disclosure Project, reduced carbon dioxide emissions and, if so, how do these reductions compare to those achieved by the mandatory carbon registry in Wisconsin and the European Union's Emissions Trading System? Second, has the voluntary Chicago Climate Exchange been cost-effective compared to the mandatory EU Emissions Trading system? Third, what are the sources of inefficiency in the implementation of the mandatory EU cap-and-trade system, and how might these inefficiencies be reduced?
This project answers these questions using fuel-expenditure and electricity-expenditure data to determine whether each program has induced firms to reduce carbon dioxide emissions. The project also compares the costs of achieving emissions reductions for both trading systems against ex-ante theoretical estimates of the marginal costs of reducing carbon emissions. Cost estimates of achieving emissions will be derived from carbon permit trading data. This project will interview firm managers and examine corporate responses to the Carbon Disclosure Project in order to uncover the specific sources of inefficiency in the European Union's cap and trade system. In particular, this research will examine aspects of firm behavior that depart from the rational economic model and how characteristics of existing regulations have led to inefficiencies.
This project seeks to provide a better understanding of the extent to which firm behavior can be influenced by social and market pressures compared with government intervention. While extensive research has studies the effectiveness of voluntary behavior by firms, this research has not explicitly compared voluntary actions to mandatory regulation. In addition, taken as a whole, this research has been largely inconclusive regarding the prospects for effective voluntary action, particularly in the area of climate change policy.
Climate change policy has become an important issue. It is crucial to understand the trade-offs between allowing market and social forces to shape firm behavior against the need for government intervention. In addition, lessons from the European Union already demonstrate some of the pitfalls associated with greenhouse gas mitigation policy. With several cap-and-trade proposals currently being discussed in Congress, it is increasingly important to understand the sources of inefficiency associated with greenhouse gas policy implementation. Armed with a better understanding of these sources of inefficiency, policymakers can design policy that builds on the actual behavior of firms, rather than on assumptions of rational behavior, helps firms adapt to changing regulatory environments, and reduces barriers to efficient outcomes.
