Compliance, environmental regulation, and quota markets

Abstract

Environmental regulations are necessary to prevent environmental damages and poor economic outcomes, but must be enforced to be effective. In most cases, perfect enforcement is not a viable option, and some non-compliance with regulations occurs. We consider two types of violations; violations of technological regulations and quota regulations. We investigate how intrinsic motivation to comply with these two types of regulations affect firm behavior and environmental markets. We develop a theoretical model of an agent facing these two types of regulations, a technological standard and a quota, which the agent can violate at the risk of being fined. We show that agents are more willing to buy quotas if they have a stronger motivation to comply with quota regulations or a weaker motivation to comply with technological regulation. We test these predictions using survey data on Norwegian fishers combined with data from several incentivized economic experiments. The empirical analysis supports the findings. Our results imply that the interaction of compliance attitudes and quota markets affect the effectiveness and efficiency of environmental regulation. This has important implications for environmental markets.