Also known as "cap and trade," emissions trading policies allow firms to buy and sell rights to emit pollution in order to achieve pollution reductions at a lower overall cost (Montgomery, 1972). Such policies have gained popularity in recent years, especially for international, national, and regional programs to reduce green-house gas (GHG) emissions. As they have gained popularity, however, these policies have also been criticized as vulnerable to compliance and enforcement problems (e.g., Stranlund, Chavez, & Field, 2002). This is ironic given that emissions trading programs, such as the 1990 U.S. sulfur dioxide ([SO.sub.2]) program, have attained some of the strongest compliance records of any environmental policy to date.
The acid rain program has achieved a high level of compliance (greater than 99 percent of all affected sources annually) in part by requiring automated continuous emissions monitors (CEMs) on most sources, making false reporting of emissions difficult (Environmental Protection Agency, 2009a). CEMs were feasible for the 1990 [SO.sub.2] program because of the relatively limited number of stationary sources affected and then-recent improvements in monitoring technology (Cole, 2002). Emissions trading programs will have to use less reliable forms of self-reporting, however, as they extend to larger "baskets" of GHGs responsible for complex problems like climate change. GHG emissions caps may be enforced "upstream" at places in the economy where there are limited immediate atmospheric emissions, such as fuel refineries, mines, or importers of carbon-based energy (Stavins, 2008). Continuous emissions monitoring is inappropriate or too expensive for many of these settings, so self-reporting based on fuel consumption or other metrics will be necessary, as was done in the early stages of the EU Emissions Trading System (EU ETS) (Ellerman & Joskow, 2008).
Less automated forms of reporting have generated worries about fraud and dishonest reporting (e.g., Green, Hayward, & Hassett, 2007; Pearlstein, 2009; Peeters, 2006). How to maintain sufficiently honest reporting of emissions at the lowest cost is therefore an important policy design question. Although self-reported emissions based on fuel-consumption formulas or other information can be verified externally, such audits are costly. As with many traditional command and control regulations, finding a way to ensure sufficient compliance at the lowest cost is desirable for emissions trading programs. Referred to as "imperfect enforcement " by economists, the threat of irregular inspection and verification of self-reports is a common approach to enforcing policies ranging from taxation and financial reporting to many environmental regulations (see Ellerman & Joskow, 2008).
This study examines "affirmative" motivations as a mechanism for improving compliance in emissions reporting under imperfect enforcement. "Negative" motivations--fear of costly punishments for detected violations--are frequently cited as a primary reason for legal obedience (following Becker, 1968), and experimental research on emissions reporting has emphasized their role (e.g., Cason & Gangadharan, 2006; Murphy & Stranlund, 2007). Other research suggests, however, that motivations beyond fear of punishment can substantially strengthen an individual's sense of "duty to comply" with a regulation (May, 2005; Torgler, 2003; Tyler, 2006; Winter & May, 2001). A critical component of these so-called affirmative motivations to comply is an individual's perception of a regulation as "fair" and "reasonable" (Levi, 1997; May, 2005). Because imperfect monitoring may make underreporting of emissions profitable (Harrington, 1988; Tietenberg, 2006, p. 65), affirmative motivations could be important to the design of current and future trading schemes.
To explore the influence of affirmative motivations, we conducted an …