Intergovernmental versus intersource emissions trading when firms are noncompliant

This paper analyzes the relative cost-effectiveness of intergovernmental versus intersource cross-border emissions trading when polluting firms are noncompliant. A special focus is placed on the presence of enforcement costs and the associated credibility problem of governmental monitoring. It is shown that without inspection commitment, the intergovernmental system is more cost-effective because the endorsed flexibility in domestic emission taxation serves as a commitment device for building credibility of monitoring.