W4 - Tradable pollution permits and overview of environmental policy instruments Flashcards
(20 cards)
What are Tradable Pollution Permits/Marketable Emissions Permits used for, and what are the basic features
Used when fixing quantity is important
Features
1) Regulator determines optimal aggregate amount of pollution
2) Amount is split into permits
3) Institution of exchange is set up
4) Market initialised via initial allocation of permits either by 1) grandfathering (allocating via existing emissions) or auctioning
5) Trading opens
What is the rationale and properties of TPP?
Rationale - allocates property rights to pollution via market institutions
Market yields a price reflecting full social cost of pollution and provides signals to demanders and suppliers to allocate the rights Pareto efficiently - without regulation it is free to pollute so pollution is a non excludable bad, but price makes it excludable
What determines where the TPP cap is?
Samuelson condition where Marginal Benefit (MB) of pollution = Social Marginal Damage (SMD)
What is the equi-marginal principle? why is it important
Condition where marginal abatement costs (MAC) pollution are equalised across different polluters, so the cost of reducing the last unit of input is the same across the board
Important as if not held, the total cost of achieving a given level of pollution reduction is higher
what is a uniformly mixed pollutant?
Pollutant where source does not matter
What are the positives of TPP’s
- market solution to internalise pollution externality
- controls total pollution + can change it to social optimum via purchase/retirement of permits
- recognises different abatement costs across firms
- promotes efficiency via equi-marginal principle as least cost abater sells and vice versa
- combines advantages of command and control with allocation capacity of market
Why don’t we use a fee approach? When does it matter what we use?
- taxes are risky when fixing amount of pollution as we dont know how polluters will react
matters when MS or MD is uncertain as equilibrium may not be Q*(optimal)
What are the problems with TPP?
- Needs penalties for going over permit allowance
- Property rights must be guaranteed
- Need a high number of firms - as it removes opportunity to hoard licenses which stops efficient operation
- High transaction costs - enforcement and information
- How should initial allocation of permits be decided? Free allocation (grandfathering) vs auctioning
- Pollution concentration means an extra unit is worse than in a remote area - this issue is not addressed
Give the example of the EU Emission Trading Scheme
- Largest ETS, market to trade pollution permits mainly for CO2 commencing 2005
- Phase 1 permit allowances largely overestimated (accused of bending to industry pressure), prices fell to zero so optimal level was overestimated
Lessons learnt - Auction more permits, allocate more centrally
- Banking of permits through phases allowed for price stability
- Enforcement was challenging
Explain the concept of command and control (CAC) Instruments, its place in environmental regulatory instruments, the role of the regulator and its main problems
The regulator determines the pollution target, specify the steps polluters must take to meet the target and commands the polluter to take the action, dominates current instruments.
Centralises the pollution control decisions that the polluter could make. Can regulate outputs (emission standards) or inputs (technical specifications).
Problems
- very high informational requirements
- inefficiency may likely arise
What is emission standards, how does it work, give a brief example, what is the issue and when is it advantageous ?
Output regulation by imposing upper limit on pollution.
Example
- Uniform emission target across the board
- Requirement that new cars can’t output >x grams CO/ mile
Inefficient as equi-marginal principle is violated
Advantageous if Pigouvian fees are difficult to implement.
What is technical standards, how does it work, give a brief example, what is the issue and when is it advantageous ?
Input regulation requires installation of tech in production process.
Example
- Catalytic convertor in cars
Disadvantage - Inefficient
Advantage - Certainty about technical characteristics
What happens if there is non compliance in CAC? What differs about that mechanism
Fine - different from economic incentives in 2) ways
1) Provide restricted choice for polluter to the means of achieving the target
2) Not adhering to the equi-marginal principle so not cost efficient
What are the 3 advantages of CAC approaches?
1) Flexibility in regulating pollution processes eg. ambient pollution difficult to address via TPP’s
2) More certainty to pollution level
3) Simplifies compliance monitoring
What are the 3 disadvantages of CAC approaches?
1) Informational costs and principle agent problem
2) Reduces incentive for finding better abatement tech
3) Difficult to satisfy equi-marginal principle
Define equimarginal principle, why is it important, what does the empirical evidence say, what does the MAC look like if the firm experiences economies of scale
Equalises marginal abatement costs across firms generating the same pollution
Important as cost of regulation will be higher if principle not held.
Empirical evidence: MAC increases as abatement does at an increasing rate (steep MAC)
If EoS gradient is - shallow - steep - shallow
How can we achieve target level of emission at minimum cost using the equimarginal principle?
Tax t* where optimal emissions = industry MAC
Each firm abates according to their individual MAC (Abate until t* = MAC)
This is minimal cost for each firm
What are the advantages of economic instruments? (2 main 2 ancillary)
1) Equimarginal principle held
2) Less informational requirements
3) Incentivises polluter to innovate
- dynamic efficiency (over time via tech innovation so better international competitiveness via Porter Hypothesis)
4) Double dividend - 1) reduced pollution 2) Revenue raised to reduce distortionary taxes
What are the 3 disadvantages of economic instruments?
1) Pollutants synergise so difficult to manage total impact looking at each in isolation
2) Politically impracticable as must negotiate with many different stakeholders
3) Politically unpopular as involves costs to firms, could be faced with lobbying
