Tradable Pollution Permits or Green Taxes/Subsidies?

Tradable Pollution Permitsor

Green Taxes/Subsidies?

James Stodder, (Ph.D., Economics, Yale 1990)Lally School of Management & Technology

Rensselaer Polytechnic Institute at HartfordHartford, Connecticut, USA

Stodder, Presentation on Pollution Permits, Sept. 14, 2011

CO2 and Temperature Change

http://www.ngdc.noaa.gov/paleo/icecore/antarctica/vostok/vostok_data.html Stodder, Pollution Permits, Sept. 14, 2011 2

CO2 and Industrialization

http://www.globalwarmingart.com/wiki/Image:Carbon_Dioxide_400kyr.png

3Stodder, Pollution Permits, Sept. 14, 2011

Surface Temp & Hurricane Intensity

“Increasing destructiveness of tropical cyclones over the past 30 years”, Nature, 8/4/05, ftp://texmex.mit.edu/pub/emanuel/PAPERS/NATURE03906.pdf

Hurricane Intensity - - -

Sept. Surface Temp __

4Stodder, Pollution Permits, Sept. 14, 2011

Stodder, Pollution Permits, Sept. 14, 2011 5

Majority Believes in Global Warming

Source: Yale University Project on Climate Change Communication

Good Old Supply & Demand!

Stodder, Pollution Permits, Sept. 14, 2011 6

Planning is Perfect – if No Uncertainty!

Stodder, Pollution Permits, Sept. 14, 2011 7

But if Costs are Uncertain …

Stodder, Pollution Permits, Sept. 14, 2011 8

… Outcome with Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 9

Losses with Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 10

Losses with Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 11

With Cost Controls, further from Equ.

Stodder, Pollution Permits, Sept. 14, 2011 12

Stodder, Pollution Permits, Sept. 14, 2011 13

Greater Losses with Cost Controls

Steep Decline in Benefits => Quantity Controls

14Weitzman (1973)

What if more Gradual Define in Benefits?

Stodder, Pollution Permits, Sept. 14, 2011 15

Stodder, Pollution Permits, Sept. 14, 2011 16

Quantity or Cost Controls?

Stodder, Pollution Permits, Sept. 14, 2011 17

Cost Controls Closer to Equilibrium

Stodder, Pollution Permits, Sept. 14, 2011 18

Quantity Controls Further from Equilibrium

19

Costs more steeply sloped than Benefits => Cost Controls

Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf

Stodder, Pollution Permits, Sept. 14, 2011 20

Best Method is an Empirical Question:

If Social Benefits are Less Price Sensitive (More Steeply Sloped) than Costs =>

Use Quantity Controls(Pollution Permits).

21Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf

Benefits more steeply sloped than Costs=> Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 22

If Social Benefits are More Price Sensitive(Less Steeply Sloped) than Costs =>

Use Cost Controls (Taxes / Subsidies).

23

Costs more steeply sloped than Benefits => Cost Controls

Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf

Stodder, Pollution Permits, Sept. 14, 2011 24

Volatility of S02 Prices, US: 1995-2006

William Nordhaus (Copenhagen, 2009)

Stodder, Pollution Permits, Sept. 14, 2011 25

Basic Business Argument:

What is more important for your Business?• Knowing the future price of energy that your

business must pay?

or …

• Knowing the future quantity of energy that the country as a whole must use?

Stodder, Pollution Permits, Sept. 14, 2011 26

Additional Arguments:

• Carbon taxes will make the cost of carbon-based energy higher, but also more stable.

• Taxes on energy are already in place. Pollution Permits would require new levels of bureaucracy.

• Much easier to tax oil at the refinery than check pollution permits at the tail pipe or smokestack.

• Carbon tax applies to all users, while permits are monitored for just the biggest polluters.

What about the Recession?

Stodder, Pollution Permits, Sept. 14, 2011 27

Martin Wolf, Financial Times, Sep. 6, 2011

Bond Market Worried About Growth

28http://research.stlouisfed.org/fred2/graph/?id=FII10,