Voluntary agreements and non-verifiable emissions

If pollution is observable, but some emissions cannot be verified by court, voluntary agreements between a regulator and an industry may be welfare-improving compared to second-best emission taxes. Such agreements differ from direct regulation in a non-trivial way. The first-best optimum may be included in the set of possible agreements, even if it is not attainable using tax instruments. The non-verifiability may, for example, be associated with delimitation problems in defining the pollution tax base.