Efficient Enforcement of Truth-Telling in the Grandfathering Process of an Emissions Trading Scheme

Emissions trading as an instrument to reduce greenhouse gases has found increasing approval over the last years. One of the challenges in putting this instrument into practice is the self-reported character of all firm data. High verification standards are therefore essential, but also costly. This analysis answers the question of how, in the grandfathering process of an emissions trading scheme, self-reported firm data can be verified in a cost-efficient way. The method used is a principal-agent model similar to those in the tax-evasion literature. Policy recommendations include specific combinations of random audits and penalties for fraudulent reporting. From a technical perspective the analysis reveals that the efficient verification of private data strongly depends on whether there are incentives to overstate or to understate the private data and that the standard equity-efficiency tradeoff does not prevail in this context.

Autorentext
The Author: Frauke Eckermann studied mathematical economics at the Universities of Bielefeld and Birmingham (UK). She worked in the department of Environmental and Resource Economics at ZEW in Mannheim, before accepting a DFG-scholarship for the Graduiertenkolleg «Allokationstheorie, Wirtschaftspolitik und kollektive Entscheidungen». Currently she works as research associate at the chair of public finance at Technische Universität Dortmund.

Inhalt

Contents: Cost-efficient verification of private data: provision of policy recommendations for receiving high verification standards in emissions trading schemes - Random versus deterministic auditing: analysis of audit costs - Incentives to overstate versus incentives to understate: comparison with tax evasion.