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Emissions trading Greg Barrett Economics Lecturer University of Canberra Carbon cycle ecology Objectives Theory Practice end of the world Carbon Cycle Asset Atmosphere 750 Gt carbon (stock) +3 Gt pa (flow) Flow 4 Gt pa Asset Plants 600Gt Soil 1600Gt Oceans 40,000Gt Flow burning 5 Gt pa Asset Fossil fuel 3300 Gt Flow Deforestation 2 Gt pa Greenhouse Response (damage function) Ambient level W>A emission (dose) CO2 concentrations 1800s 1960 1988 2005 parts per million 290 315 350 379 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 externality ogreen taxes Efficiency & Effectiveness •emissions omarket trading Production & consumption externalities $ SS SP production PS PP DS XS $ PP PS $ XP output & W SS consumption DP DS output & W XS MNPB XP XA XP MEC PS XS output & W 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 $/t MAC 1 MAC 2 t1 MAC 3 t2 t3 S2 tons of abatement Regulating quantity by licensing 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 $/t MAC 1 MAC 2 t1 MAC 3 t2 t3 S 1 S2 S 3 tons of abatement Green emissions tax Allowing trading of licenses Fox River Discharger Impact MAC MC/DO coeff $US/lb $US/µg/l 1 2 3 4 5 6 7 107 189 373 231 184 214 101 7.20 2.10 1.90 3.10 1.80 7.90 2.60 72 11 5 14 11 37 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 • Advantages Tradeable permits Savings in compliance costs. • Allows new polluters to buy quota from old (economic growth). • Flexible •limits total emissions • target can be adjusted o pollution outcome certain o target area -bubbles o •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-run o 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 problems Permits not traded • grandfathering Market segmented • Clean Development Mechanism Over allocated • imperfect information Time frame too short • long-term investments Outcome: price $US/t CO2e 2005 2006 2007 • 2008 • target • • • 23 22 0 27 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 brokers o auctions o fines o information o