Emissions trading

end of the world

Greg BarrettEconomics Lecturer

University of Canberra

Carbon cycle ecologyObjectivesTheoryPractice

Carbon CycleAsset

Atmosphere750 Gt carbon (stock)

+3 Gt pa (flow)

AssetPlants600GtSoil

1600GtOceans40,000Gt

AssetFossilfuel

3300 Gt FlowDeforestation

2 Gt pa

Flow4 Gt pa

Flowburning

5 Gt pa

GreenhouseResponse(damage function)

AmbientlevelW>A

emission(dose)

CO2 concentrationsparts per million

1800s 290 1960 315 1988 350 2005 379

Allen Kneese

Opposed•Direct regulation•Subsidies

Supported•recycling•green taxes•tradable permits•ethics

Ethics

Who polluted most?

Who is responsible?

Who should pay?

Objectives

Effectiveness: reduce pollution•regulate quantities

ogovernment

Efficiency: minimise pollution cost

•price externalityogreen taxes

Efficiency & Effectiveness•emissions trading

omarket

Production & consumption externalities

output & W

output & W

output & W

SP

SS

SS

DP

DS

DS

production

consumption

MECMNPB

XS

XS

XP

XP

XPX

A

XS

PS

PS

PS

PP

PP

$

$

$

EU air pollution

Shorter life span• 8.6 months

o cardiovascular & respiratory diseases

Policy (Clean Air for Europe )• save 2.3 months • worth 161 billion euros a year

Productive efficiency

Regulating quantity by licensing

MAC3

MAC1

MAC2

S2

t2

t3

t1

$/t

tons ofabatement

Marketable permits

Definition•Property rights•Tradeable license

o to pollute or extract resource

Allocation•ownership•initial allocation

o grandfathering vs auctions•reallocation over time

Productive efficiency

MAC3

MAC1

MAC2

S3S2S1

t2

t3

t1

$/t

tons ofabatement

Green emissions taxAllowing trading of licenses

Fox RiverDischarger Impact MAC MC/DO

coeff $US/lb $US/µg/l

1 107 7.20 72

2 189 2.10 11

3 373 1.90 5

4 231 3.10 14

5 184 1.80 11

6 214 7.90 37

7 101 2.60 27

Examples

Resource license trading• fishing quotas• irrigation licenses

Pollution emissions trading• SO2 1970 USA

• lead 1985 USA

• SO2 1990 USA

• CFCs Australia

• Salt 2004 NSW

• CO2 2003 NSW

• CO2 2005 EU

• CO2 2008 NZ

Tradeable permitsAdvantages

• Savings in compliance costs.• Allows new polluters to buy quota from old (economic growth).• Flexible•limits total emissions

o target can be adjustedo pollution outcome certaino target area -bubbles

•lower abatement cost•adjusts to economy

Appropriateness• Compliance costs vary • Sufficient trades & traders • Fixed polluters.• Encourages technological change• Needs market intermediation • Environmental impact same

Problems• multiple pollutants• Concentrating polluters • Economic rents accrue to polluters• High transactions costs• Needs a sophisticated market• set up & administration costs• low usage

Relevance to environmental media

Acid Rain Program SO2 Allowances Transferred

Price of Sulfur Dioxide Allowances

reduction in allowances• initially

oprice not increasing– Technological change?

• long-runo price rise

Outcomes percentage change

“heat input,” = combustion of fossil fuels

* Generation from fossil fuel-fired plants.

** Constant year 2000 dollars adjusted for inflation.Source: Energy Information Administration (electricity generation, retail price); EPA (heat input and emissions, representing all affected ARP units), 2007

NSW Benchmark Scheme

Fine of $10.50/t CO2• NSW electricity retailers

Pollution permits (NGSC)• renewable energy, forests

EU ETS trading problemsPermits not traded

• grandfatheringMarket segmented

• Clean Development MechanismOver allocated

• imperfect informationTime frame too short

• long-term investments

Outcome: price $US/t CO2e• 2005 23 • 2006 22• 2007 0• 2008 27• target 20-50

Cost• 0.1% of GDP per year

Conclusion

Political decision• regulate price or quantity• create property rights

Practical solution• costs are modest• learn from experience

Institutions important• market institutions

o brokerso auctionso fineso information