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Cap and Trade: Theory and Practice in Environmental Economics, Slides of Environmental Economics

Indian Institute of Tourism and Travel ManagementEnvironmental Economics

An in-depth analysis of cap and trade, an economic instrument used to control pollution through market-based mechanisms. The theory behind cap and trade is explained, including its creation of a market for the right to pollute, efficiency and effectiveness requirements, initial allocation of permits, and the role of auctions and free allocations. Real-world examples, such as the u.s. Sulfur oxide program, illustrate the practical applications and benefits of cap and trade, including cost savings, flexibility, and technological innovation.

Typology: Slides

2012/2013

Uploaded on 01/29/2013

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Environmental Economics
Environmental Economics
Economic Incentive
Instruments (continued)
•Marketable Emissions Permits
– Cap and Trade
– Emission Reduction Credits (ERC)
Cap and Trade—
Theory
• Dales –1960 Proposed—
• Officials do not need to know abatement
costs
• Get a cost minimizing solution
• Modest monitoring burdens for
regulators
• Although can have high transaction costs
for regulated
• Promotes technological innovation
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Download Cap and Trade: Theory and Practice in Environmental Economics and more Slides Environmental Economics in PDF only on Docsity!

Environmental Economics Environmental Economics

Economic Incentive

Instruments (continued)

  • Marketable Emissions Permits
    • Cap and Trade
    • Emission Reduction Credits (ERC)

Cap and Trade—

Theory

  • Dales –1960 Proposed—
  • Officials do not need to know abatement costs
  • Get a cost minimizing solution
  • Modest monitoring burdens for regulators
  • Although can have high transaction costs for regulated
  • Promotes technological innovation

Cap and Trade--Theory

  • Creates a market for the right to pollute
  • Outcomes similar to taxes and subsidies approach but works in terms of quantities and not prices

Cap and Trade—Theory

  • To be efficient and effective =
  • Must have a property rights

structure that supports trading

Cap and Trade--

Theory

  • Total Quantity to be Allowed (e.g. The Cap) (must be constraining)
  • Rule: All polluters must have permits for quantity of their emitted pollution
  • Monitoring and Effective Penalties (Penalties are greater than permit prices)

Cap and Trade—Initial

Allocation of Permits

  • Auction permits
  • Free initial allocation on arbitrary

basis

Cap and Trade—Initial

Allocation of Permits

  • In a well functioning competitive market, same market price would emerge from either allocation method
  • Monopolization leads to strategic behavior
  • Allocation methods will differ as to their impact on income and wealth and agency revenue generation

Cap and Trade—Compared

with Conventional Markets

  • Environmental Goods and Services Markets differ from Conventional Goods and Service Markets
  • Buyers are not knowledgeable what is being traded
  • Demand is driven by regulatory requirements of a cap

Cap and Trade—

Compared with

Conventional Markets

  • Supply is determined by what regulators say can be exchanged
  • Quality consciousness is only as good as required by regulator
  • Three parties—demanders, suppliers, and regulators

Cap and Trade—Point

Source Example

  • U.S.—Sulfur Oxide (SO 2 ) Emission Trading
  • Established 1990 Clean Air Act Amendments
  • Goal: Reduce emissions by half or 10 million tons
  • 9 million tons worth of permits issued
  • Target was electricity sector

U.S. Sulfur Oxide

Program

  • Anyone can buy permits
  • Penalties set at $2000 a ton
  • Original estimates of probable

permit prices were as high at $

  • Prices actually were much lower than

predicted—as low now as $

Tietenberg– Other

Countries?

  • Do they have sufficient

organizational resources and capacity

to use cap and trade?

  • Property right structure matters
  • Chile-Santiago industrial air point

sources of particulates

Stavins-Lessons

  • Point of control
  • Information needs and costs
  • Initial allocation of permits