Straight and narrow
Europe's polluters comply with the EU ETS, despite the low risk of a penalty
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.
If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.
Estimated reading time ~ 8 mins
According to Gary Becker’s theory of rational crime, a profit-maximising firm will comply with an environmental regulation, but only as long as the expected penalty of violating it exceeds the compliance cost.
Economists have long been puzzled by evidence that seems to contradict Becker’s theory. The economist Winston Harrington first documented this in a paper published in 1988 based on research into compliance with environmental regulations in the United States, during the late 1970’s and into the 1980’s. The upshot is that firms appear to comply with environmental regulations to a much higher degree than that predicted by ‘rational crime’.
Harrington’s Paradox is the notion that firms in general comply with environmental regulations, in spite of the fact that they tend to be subject to infrequent environmental monitoring, discretions are rarely punished, and the expected fine is minimal compared to the cost of meeting compliance.
Subsequent researchers have questioned Harrington’s findings, often struggling to uncover data that supports the existence of a paradox. However, a recently published paper by researchers at Georgetown University and the Grantham Research Institute, examined historical trends in compliance with the EU ETS with the data appearing to support the existence of Harrington’s Paradox.
