Lecture 3: Regulatory instruments used in environmental policy - Part 2

Question 1

Tradeable Permits

Answer 1

• Cap and trade and tradable quotas
• Market-based command and control instruments
• Cost effective because the prevailing market prices implies equimarginal principle holds
• Price (P) = Marginal Savings of emissions of any market participants
• Cost-effective, economic instrument, efficient IF at Piguovian tax level

Question 2

Allocation of Tradeable Permits

Answer 2

Could be through:
1. Auctions: Action by regulatory/market agency but anticipating market prices is hard
2. Grandfathering: Permits handed out of no cost to emitters - based on expected/past emitters –> Better for emitters because can actully make profit

> Initial allocation doesn’t influence final market equilibrium BUT impacts profits of firms

Question 3

Trading of Tradeable Permits

Answer 3

Drives cost-effective equilbirium
- Trade until market equilbirium/cost-effective
- Trading is prompted by Opportunity Cost of allowances and differences in Marginal Savings between firms

Question 4

Transaction Costs of Tradeable Permits

Answer 4

• Tradeable permits imply transaction costs
• Based on: search and info costs, bargainning costs, and Decision-making costs

Higher transaction costs for ambient permit costs vs. emission permit markets

Question 5

Liability Regulatory Instruments

Answer 5

Legal instrument of prescribing the payment of compensation to those suffering damages because of the actions (or lack of) of other parties.
- Cost-effective, economic instrument, and efficient (if Piguovian Tax)

Question 6

Types of Liability Regulatory Instruments

Answer 6

1. Ex-post aim: remediating intent i.e. bringing back victims to their financial position before the event
2. Ex-ante aim: Allocative i.e. provide incentives so that emitters take efficient precaution

Question 7

Expect Damages (ED)

Answer 7

Related to liabilities
= probability of damage * value of damages (p*d)

Question 8

Marginal Expected Damages (MED)

Answer 8

Related to Liabilities; Derivative of ED
- Value of MED is negative as ED decreases when the level of precaution increases (precaution on x axis)

Question 9

Cost of Precaution

Answer 9

• Cost of implementing a certain level of precaution

Question 10

Marginal Cost of Precaution

Answer 10

• Related to liabilitis
  Positive as costs increase as precaution levels go up (cheap ones are implemented first)

Question 11

Types of Liabilities

Answer 11

-Strict Liability: Potential injurer liable regardles of taken amount of precaution. Damages always borne by potential injurer.
- Negative Liability: Potential injurer liable only if they took less than legal standard of care; Victims have to bare damages if no negligence. Less burden on courts.
- Joint and Several Liability: Legal challenge for all damages may be brought by anyone in chain.

Question 12

Price v. Quantity-Based Instruments

Answer 12

• Price-based instruments provide certain MC and uncertain emissions; Should use if flattening MD and harsh MS
• Quantity-based instruments provide certain emissions and uncertain MC; Should use if flattening MS and harsh MD

Question 13

To compute costs sustained by firms in any permit allocation

Answer 13

Find area of under the MS curve from the allocated permit amount to the max amount of emissions for that respective firm.

Question 14

To compute the tradeable market price for permits

Answer 14

Calculate the maximum amount of emissions based on the permits given, then calculate the MS at that point of the market curve and then that’s the price for trading!

Question 15

To verify the equimarginal principle holds

Answer 15

Verify that MS of each firm is equivalent to one another at the price and emissions level for each firm.