lecture_enviro_part2_2011

lecture_enviro_part2_2011 - Applications of Cap-and-Trade...

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Applications of Cap-and-Trade Energy Economics and Policy ECON 489/689
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2 Complementary Readings “How Economists See the Environment”, Fullerton and Stavins (1998), Nature , October 1, pp. 433-434. “Tools of the Trade: A Guide to Designing and Operating a Cap and Trade Program for Pollution Control”, Environmental Protection Agency (2003), June, chapters 1-2.
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3 Reminder of Basic Structure of a Cap-and-Trade System Establish an aggregate limit on total pollution within a region (the cap) Limits apply to totals; not emissions by a specific source Define and allocate property rights (emissions credits) to the pollution levels below the cap Sum of the allocated property rights adds up to the cap e.g. allocate 1000 permits that each allow 1 ton of CO2 - equals a total limit of 1000 tons of CO2 Could be distributed via allocation, auction, lottery, etc. We’ll return to this later (lots of $$, and some efficiency at stake) Firms must acquire emissions credits equal to the amount of pollution they create
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4 How Can Firms Respond to Cap-and-Trade Policy? 1. Install pollution abatement equipment E.g. powerplants install “scrubbers” to remove SO 2 from emissions 2. Switch to fuel with fewer emissions E.g. use low sulfur rather than high sulfur coal 3. Reduce production from “dirtier” plants / shutdown
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5 When Is Cap-and-Trade Likely to Reduce Pollution at Lowest Cost (compared to command-and-control)? 1) Firms are heterogeneous – have different abatement cost functions 2) Transaction costs are small 3) Firms face similar incentives as “textbook models” 4) Emissions can be monitored reliably & cost effectively
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6 When Is Cap-and-Trade Likely to Reduce Pollution at Lowest Cost? 1) Firms are heterogeneous – have different abatement cost functions Think about what the efficiency gains would be compared to “command-and-control” if abatement costs same across firms <see figure>
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7 0 10 20 20 10 0 Firm A emissions Firm B emissions $$ 20 units of total emissions reduction required 200 75
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8 When Is Cap-and-Trade Likely to Reduce Pollution at Lowest Cost? 1) Firms are heterogeneous – have different abatement cost functions Think about what the efficiency gains would be compared to “command-and-control” if abatement costs same across firms <see figure> More differences in cost of abatement more “room for a deal”
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9 When Is Cap-and-Trade Likely to Reduce Pollution at Lowest Cost?
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This note was uploaded on 02/20/2012 for the course ECON 489 taught by Professor Nelson during the Fall '08 term at Texas A&M.

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lecture_enviro_part2_2011 - Applications of Cap-and-Trade...

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