Session 4 Flashcards
What problems do regulators have in regard to climate policies in practice?
The fundamental inputs for determining efficient level of pollution and/or optimal tax rates are uncertain. This puts the regulator at risk of making wrong decisions and regulatory failure.
Reasons:
- Abatement costs are private information of firms
- physical damages have to be estimated with scientific models
- monetary damages from physical damages add extra layer
- future of technology & prices not known
What is Climate Sensitivity?
Change in average surface temperature, if amount of CO2 in the atmosphere is doubled (relative to pre-industrial levels)
Why is the economic growth rate important for climate change questions?
- economic output and its development is a driving factor for emissions
What are ex-ante & ex-post decisions?
ex-ante: a decision that is optimal relative to information at time t
ex-post: a decision that is best decision, given the realization of the uncertainty
What are important criteria for pollution control instruments under uncertainty?
- dependability: with what probability does the instrument achieve the target?
- flexibility: how easy is it to adopt the system to changing circumstances?
- cost of uncertainty: how large are efficiency losses, if assumptions are violated?
- information requirements: how costly is it to obtain the required information to implement the instrument?
How do price & quantity instruments perform under under uncertainty in regards to dependability (= with what probability does the instrument achieve the target)?
- price: fix price & result in uncertain quantities
- quantity: fix quantity & result in uncertain price
How do price & quantity instruments perform under under uncertainty in regards to dependability?
- hard to make general statement
- price based are thought to be less flexible than quantity instruments
- command and control instruments might often be more flexible
How do price instruments behave in regards to price & quantities?
result in fixed price and uncertain quantities (depend on marginal cost of abatement)
How do quantity instruments behave in regard to emission price and quantitiy?
result in uncertain price and fixed quantitiy
Comparing the slopes of marginal emission damage & cost curves, which instrument (taxes vs licenses) is preferred?
- MC slope < MD slope -> licenses
- MC slope > MD slope -> taxes preferred
What hapens when firms expect a permit system in regards to reporting costs?
- firms have incentive to over-report as price would be lower
- information about true costs lie in permit price
What happens if firms expect an emission tax in regard to reporting costs?
- firms have incentive to under-report as tax would be smaller
- information lies in true emission quantity
Both permits and taxes are vulnerable to misstating costs.
How can a scheme look which is economically efficient and incentivizes to be thruthful?
What happens if firms understate/overstate abatement costs?
What is the pollution abatement cost function in this case?
- assume MD is known
- scheme is mix of marketable permits and subsidies for excess emissions reduction
- L permits are allocated through auction
- Firms receive subsidy payment for emitting less than their permits
- Subsidy rate s is set at the prcie defined as the intersection of reported MC and MD
- Pollution abatement cost function PCC(M) = A(M) + P*L- s(L - M)
- P = price of permits
- understating: firms loose because they emit less & pay higher price for permits & not subsidies are payed out
- overstating: firms loose because high subsidy payment drives up emission certificate price, loss due less emissions, pay higher price for permits & no subsidies payed (costs exactly balance out gain from overstating)
How do transaction costs influence policy making and where do they come from?
- creating regulations creates transaction costs mainly due to uncertainty
- include: acquiring information, monitoring and enforcing, establishing and implementing instruments, monitoring performance
- not real resource costs & indirect costs like loss of competitiveness of an economy
- decision on regulation always has to consider total cost
- transaction costs significant -> simple command & control instruments are attractive
What is regulatory failure?
- when regulatory costs exceed benefits
- another form is regulatory capture: firms influencing politics through lobbying etc.
