Design of New Environmental Trading Programs to Be Studied Under $1 Million EPA Grant at UMass Amherst
June 12, 2008
| Contact: | John Stranlund 413/545-6328 |
AMHERST, Mass. – A team of researchers including John Stranlund of the University of Massachusetts Amherst has received a grant from the U.S. Environmental Protection Agency to design the next generation of environmental trading programs. This is especially timely as 10 northeastern states belonging to the Regional Greenhouse Gas Initiative launch the first cap-and-trade program for greenhouse gas emissions in the U.S. in 2009.
The project is part of a three-year, $1 million grant received from the U. S. EPA by Stranlund, James Murphy and John Spraggon of the UMass Amherst department of resource economics, and researchers from Purdue and Chapman universities.
Stranlund will gain information from UMass students, who will soon be competing in an economic computer game of his creation. As the students watch their decisions turn into cash, Stranlund will gain information on how government enforcement and other design features can affect the success of new environmental trading programs for greenhouse gas emissions and water pollution.
“Similar to existing environmental trading programs that require pollution sources to purchase permits in order to emit pollutants, the students will need to purchase permits before producing a certain commodity,” says Stranlund. “Like their real-world counterparts, they can also cheat, be subject to random audits and have to pay fines if they violate their permits.”
According to Stranlund, current trading programs for air pollutants have been successful in reducing emissions of sulfur dioxide and other pollutants from power plants and refineries because of the continuous emissions monitoring systems they are required to install. The current grant will be looking at what happens when you move trading programs into areas that are harder to monitor, such as water pollution and carbon emissions.
“Designing these new schemes with the same continuous monitoring requirements as those found at power plants would not be feasible, since the devices can be expensive, and may not be appropriate for small pollution sources,” says Stranlund.
Limited monitoring leaves government agencies with no way to ensure that industries are truthfully reporting the amount of pollution they produce, a subject that Stranlund has a keen interest in. In 2005, he published a theoretical paper on compliance showing that high penalties may actually encourage industries to break the rules.
“It may seem logical to put a high price on the permits that firms have to purchase in order to emit pollutants, and assess large penalties when they break the rules, but my research has shown that this may actually encourage firms to underreport pollution and hide infractions,” says Stranlund. “What you want to do is encourage truthful reporting.”
Students will also be able to purchase permits and hold them for the future, allowing Stranlund to assess how rules that allow pollution sources to “bank” their permits can improve market performance. According to Stranlund, one of the key problems with banking is that it can create “hot spots” when emissions rise as a number of firms try to use banked permits at the same time.
“The ultimate goal of the project is to develop practical guidelines that the government can use to design emissions trading programs that have high rates of compliance while conserving private and public costs of achieving environmental quality goals,” says Stranlund.
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