BASD505 Course Notes 7

BASD505 Course Notes 7 - Transferable Discharge Permits...

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Unformatted text preview: Transferable Discharge Permits Like emission taxes and subsidies, transferable discharge permits (TDP) is an incentive-based policy TDP policies are also called emissions trading schemes, marketable emissions per- mits, and cap-and-trade policies To comply with the TDP policy, each source of pollution must hold enough permits to cover their emissions A TDP policy includes four main steps 1. choose a target level of aggregate emissions (say E ) 2. issue E/x permits, each of which conveys the legal right to emit x units of pollution 3. distribute the permits to the pollution sources covered by the policy 4. allow the sources to trade these permit among themselves We'll assume each permit conveys right to emit 1 unit of pollution and the regulator issues E permits Two main ways to distribute the permits 1. give them away (maybe some % of existing emissions; ie, grand-fathering) 2. auction them If permit market is competitive, an equilibrium price of permits will be established Basic Economics of TDP Schemes Consider a single source (eg, a rm) that can buy and sell permits in a market where the permit price is p * The rm can deal with each unit of emissions in one of two ways buy a permit and discharge that unit of emissions into the environment abate that unit of emissions $/unit e * e U MAC emissions p * Assuming the rm will do whatever is cheapest if the rm's MAC is more than p * , the rm will buy a permit and discharge that unit (this is true emissions above e * ) if the rm's MAC is less than p * , the rm will abate and avoid having to buy a permit (this is true for emissions below e * ) So the rm will reduce its emissions to e * units and hold e * permits BASD 505 Lecture 7: page 2 If something causes the equilibrium permit price to change, the rm will adjust its emission level and permit holdings if the price rises, the rm will buy fewer permits and reduce emissions if the price falls, the rm will buy more permits and increase emissions e * D = MAC 1 2 1 2 emissions $/unit e * p * p * s CONCLUSION: Because each rm picks its emission level so that its MAC is equal to the permit price the quantity of permits demanded by a rm depends on the price of permit and the rm's MAC curve. In other words, the rm's MAC curve can be viewed as its demand curve for permits If the permit market is competitive, the equilibrium price of permits is determined by the interaction of aggregate supply and aggregate demand the aggregate supply of permits is xed at the total number of permits issued by the regulator the aggregate demand for permits is the sum of the individual demands of all sources BASD 505 Lecture 7: page 3 Consider two rm's that emit the regulated pollutant in a competitive permit market $/unit 1 e * 1 e D 1 =MAC 1 D 2 =MAC 2 p * $/unit 2 e * 2 e $/unit D AGG =D 1 +D 2 e AGG 1 2 e * = e * + e * AGG So the aggregate demand curve for permits is derived by horizontally summing the demands curves (ie, MAC curves) of the individual sources (ie, D AGG =...
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BASD505 Course Notes 7 - Transferable Discharge Permits...

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