Economics
Tradable Pollution Permits
Tradable pollution permits are a market-based environmental policy tool that allows companies to buy, sell, and trade permits to emit pollutants. The government sets a cap on total emissions and issues a corresponding number of permits, which can be bought and sold among companies. This system creates a financial incentive for companies to reduce their emissions and rewards those who do so efficiently.
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12 Key excerpts on "Tradable Pollution Permits"
eBook - ePub- Bernd Hansjürgens, Ralf Antes, Marianne Strunz(Authors)
- 2011(Publication Date)
- Routledge(Publisher)
Command-and-control policies are criticised by economists mainly because they are not cost-effective. The regulator does not have the necessary information about the cheapest way to abate emissions, nor do the addressees of regulatory prescriptions face adequate incentives to search for innovative least-cost abatement strategies. The result is that environmental policy is a field that is primarily characterised by technical and legal solutions, thus leading to an alliance between engineers and lawyers. Environmental decisions are not dealt with in the companies' strategic departments, nor do they lead to a bundling of companies' competences with respect to discovering new and innovative solutions. Therefore, the assumption made by economists is that environmental policies based on such command-and-control policies are unnecessarily expensive.The idea behind permit trading is to assign permits (similar to property rights) governing the limited use of the environment, with the sources subject to the trading scheme being required to surrender an allowance for every unit of pollutants they use. The total number of permits issued guarantees that the overall environmental target will be met. The permits are allocated to polluters, who can either use them to cover their own emissions or exchange them with other polluters. The permits are allocated to firms or private households either by selling them, i.e. by auctions, or free of charge, i.e. by a “grandfathering mechanism”. Polluters who have excess permits can sell emissions rights on the permit market, whereas polluters who need additional permits can purchase them on the market. Participants in a permit market make their abatement decision by comparing the cost of additional abatement measures and the price of emissions rights on the permit market. Polluters with higher marginal abatement costs purchase permits, while polluters with lower marginal abatement costs carry out abatement measures and sell their surplus permits on the market (Antes 2006).
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
________________________ WORLD TECHNOLOGIES ________________________ Under a tradable permit system, an allowable overall level of pollution is established and allocated among firms in the form of permits. Firms that keep their emission levels below their allotted level may sell their surplus permits to other firms or use them to offset excess emissions in other parts of their facilities. Market-based and least-cost Economists have urged the use of market-based instruments such as emissions trading to address environmental problems instead of prescriptive command and control regulation. Command and control regulation is criticized for being excessively rigid, insensitive to geographical and technological differences, and for being inefficient. However, emissions trading requires a cap to effectively reduce emissions, and the cap is a government regulatory mechanism. After a cap has been set by a government political process, individual companies are free to choose how or if they will reduce their emissions. Failure to reduce emissions is often punishable by a further government regulatory mechanism, a fine that increases costs of production. Firms will choose the least-costly way to comply with the pollution regulation, which will lead to reductions where the least expensive solutions exist, while allowing emissions that are more expensive to reduce. History The efficiency of what later was to be called the cap-and-trade approach to air pollution abatement was first demonstrated in a series of micro-economic computer simulation studies between 1967 and 1970 for the National Air Pollution Control Administration (predecessor to the United States Environmental Protection Agency's Office of Air and Radiation) by Ellison Burton and William Sanjour. These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- The English Press(Publisher)
A cap-and-trade system constrains the aggregate emissions of regulated sources by creating a limited number of tradable emission allowances, which emission sources must secure and surrender in number equal to their emissions. In an emissions trading or cap-and-trade scheme, a limit on access to a resource (the cap) is defined and then allocated among users in the form of permits. Compliance is established by comparing actual emissions with permits surrendered including any permits traded within the cap. Under a tradable permit system, an allowable overall level of pollution is established and allocated among firms in the form of permits. Firms that keep their emission levels below their allotted level may sell their surplus permits to other firms or use them to offset excess emissions in other parts of their facilities. Market-based and least-cost Economists have urged the use of market-based instruments such as emissions trading to address environmental problems instead of prescriptive command and control regulation. Command and control regulation is criticized for being excessively rigid, insensitive to geographical and technological differences, and for being inefficient. However, emissions trading requires a cap to effectively reduce emissions, and the cap is a government regulatory mechanism. After a cap has been set by a government political process, individual companies are free to choose how or if they will reduce their emissions. Failure to reduce emissions is often punishable by a further government regulatory mechanism, a fine that increases costs of production. Firms will choose the least-costly way to comply with the pollution regulation, which will lead to reductions where the least expensive solutions exist, while allowing emissions that are more expensive to reduce. Emission markets For trading purposes, one allowance or CER is considered equivalent to one metric ton of CO 2 emissions.
eBook - PDFEnvironmental Policymaking
Assessing the Use of Alternative Policy Instruments
- Michael T. Hatch(Author)
- 2012(Publication Date)
- SUNY Press(Publisher)
The kinds of market-based instruments in Euro- pean environmental regulation include water effluent charges, eco-taxes, deposit-refund systems, and emissions trading. Few European countries have followed the United States’ lead in developing tradable emissions permit systems. German air pollution law allows sources to transfer emission reduction obligations but that only rarely occurs. The Netherlands has a bubble policy for power plants which allows facilities to treat all emissions from one facility as one source. Australia, Canada, and the United Kingdom have consid- ered pollution trading policies, but no country has embraced emissions trading except the United States. The primary focus in Europe has been on green taxes, rather than on trading programs. The United 178 Gary C. Bryner States is one of the few countries where tradable permits have been used extensively. Its experience deserves particular study. Results of emissions trading programs Emissions trading is an important, useful innovation in environmental regulation in the United States. As the experience with this regulatory tool in federal and state environmental programs shows, pollution trad- ing reduces compliance costs of regulated industries and gives them more flexibility to meet emission goals. Emissions trading also helps generate political support for new regulatory programs and serves as a basis for fashioning compromises acceptable to a wide-range of interests. Carefully designed programs can simplify some of the regulatory tasks of government agencies and the compliance burdens on regulated sources. Trading programs may reduce the cost of achieving expensive environ- mental goals to acceptable levels, and may make it possible to take on environmental problems that otherwise are not addressed. Reducing regulatory costs Emissions trading programs generally reduce the cost of compliance for regulated industries.
eBook - ePub- Todd L. Cherry, Stephan Kroll, Jason Shogren(Authors)
- 2007(Publication Date)
- Taylor & Francis(Publisher)
Part ITradable permit markets
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1 Baseline-and-credit emission permit trading
Experimental evidence under variable output capacity
Neil J. Buckley, Stuart Mestelman, and R. Andrew Muller
Introduction
Emission trading is now well established as a method for regulating emissions of uniformly mixed pollutants. The classic analysis assumes that the regulatory authority sets an aggregate cap on emissions from a set of sources and then divides the cap into a number of tradable permits (frequently called allowances), each of which authorizes the discharge of a unit quantity of emissions. Although the allowances could be sold at auction to raise revenue, the most frequently discussed plans assume that the permits will be distributed to the regulated firms on some ad hoc basis. Firms then trade the allowances, establishing a market price. In equilibrium, individual firms choose emissions such that the marginal cost of abating pollution equals the allowance price, thereby minimizing the cost of maintaining the mandated level of emissions. They redeem allowances equal to the emissions discharged, selling or banking the remainder. If emissions exceed the initial distribution of allowances the firm must purchase allowances to cover the excess. Such plans are generally known as cap-and-trade plans. A good example is the US EPA’s sulfur dioxide auction.Many field implementations of emissions trading take a different approach. An example is the clean development mechanism proposed under the Kyoto Protocol. In these baseline-and-credit plans there are no explicit caps on aggregate emissions. Instead, each firm has the right to emit a certain baseline level of emissions. This baseline may be derived from historical emissions or from a performance standard that specifies the permitted ratio of emissions to output. Firms create emission reduction credits by emitting fewer than their baseline emissions. These credits may be banked or sold to firms who exceed their baselines. The effect is to limit aggregate emissions to an implicit
eBook - PDFThinking Ecologically
The Next Generation of Environmental Policy
- Marian R. Chertow, Daniel C. Esty(Authors)
- 2008(Publication Date)
- Yale University Press(Publisher)
Setting the amount of the tax is, of course, not a trivial matter. Policymak-ers cannot know precisely how firms will respond to a given level of taxation, so it is difficult to know in advance precisely how much cleanup will result from any given charge. Nevertheless, in recent years, tax or green fee pro-grams have been used successfully to phase out production of CFCS and other ozone-layer-harming chemicals and to promote better municipal solid waste management practices by charging people by the bag for the garbage they throw out. Tradable permits get much the same results as pollution charges, but avoid the problem of trying to predict the results. 7 Under this system, policy-makers first set a target of how much pollution will be allowed for an industry, an area, or a nation. Companies generating the pollution then receive (through free distribution or auction) permits allowing them a share of the total. Firms that keep their emission levels below the allotted levels can sell their surplus permits to other firms or use the allotment for one of their facili-ties to offset excess emissions in another one of their plants. Firms that run out of allowances must buy them from other companies or face legal penal-ties. In either case, it is in the financial interest of the participating firms to reduce emissions as much as they efficiently can. There are now in place a number of successful applications of trading programs. In the 1980s, the EPA developed a lead credit program that allowed gasoline refiners greater flexibility in meeting emission standards at a time when the lead content of gasoline was being reduced to 10 percent of its previous level. 8 If refiners produced gasoline with a lower lead content than was required during any time period, they earned lead credits that could be either banked for the future or traded immediately with competitors.
eBook - ePubEnvironmental and Natural Resources Economics
Theory, Policy, and the Sustainable Society
- Steven Hackett, Sahan T. M. Dissanayake(Authors)
- 2014(Publication Date)
- Routledge(Publisher)
There are both static and dynamic advantages associated with tradable allowance systems. A clear static advantage of tradable allowances is that substantial cost savings are realized from permitting low-abatement-cost firms to sell allowances to high-abatement-cost firms. Consequently, an overall pollution abatement target can be realized at lower total compliance cost when allowances are tradable. Moreover, as firms with high abatement costs are paying others to abate pollution for them, this payment becomes a cost and so gives these firms an incentive to find a cheaper way to reduce emissions—R&D.A dynamic advantage of tradable allowance systems is that by making pollution abatement a revenue source, it gives some firms an incentive to invest in cleaner production technology over time so that they can increase allowance sales. Eventually, then, one would expect that widespread investment in cleaner production technology would cause the supply of allowances to grow, the demand to shrink, and prices to fall. As a final point, allowance trading assigns a price to pollution and thus can at least partially internalize negative externalities. As we learned in Chapter 4 , internalizing negative externalities causes the price of polluting goods to rise, thereby reflecting the marginal social costs of production. By reducing the implicit subsidy to polluting goods, such a policy will change the composition of goods in the market itself. In particular, it will help create a market for lower-polluting goods that were formerly suppressed due to higher marginal private costs of production.Table 10.8 Industrywide Cost of Compliance After Limited Allowance TradingFirm 1. Marginal abatement cost ($) 2. Pollution abatement responsibility (tons) 
eBook - PDF- Frank R. Spellman(Author)
- 2015(Publication Date)
- CRC Press(Publisher)
Each of these systems is discussed in turn below. Cap-and-Trade Systems In a cap-and-trade system, the government sets the level of aggregate emissions, emission allowances are distributed to polluters, and a market is established in which allowances may be bought or sold. The price of emission allowances is allowed to vary. Because different polluters incur different private abatement costs to control emissions, they are willing to pay different amounts for allowances. Therefore, a cap-and-trade system allows polluters who face high marginal abatement costs to purchase allowances from polluters with low marginal abatement costs, instead of installing expensive pollution control equipment or using more costly inputs. Cap-and-trade systems also differ from command-and-control regulations in that they aim to limit the aggregate emission level over a compliance period rather than estab-lish an emission rate. If the cap is set appropriately, then the equilibrium price of allowances, in theory, adjusts so that it equals the marginal external damages from a unit of pollution. This equivalency implies that any externality associated with emissions is completely internalized by the firm. For polluters with marginal abatement costs greater than the allowance price, the least expensive option is to purchase additional units and continue to emit. For polluters with marginal abatement costs less than the allowance price, the least expensive option is to reduce emissions and sell their permits. As long as the price of allowances differs from individual firms’ marginal abatement costs, firms will continue to buy or sell them. Trading will occur until marginal abatement costs equalize across all firms. The U.S. Acid Rain Program established under Title IV of the 1990 Clean Air Act Amendments is a good example of a marketable permit program; see Sidebar 6.1.
eBook - PDF- John J. Siegfried, John J. Siegfried, John J. Siegfried(Authors)
- 2010(Publication Date)
- Harvard University Press(Publisher)
Emissions-trading programs can (and should) be tailored to each specific application. The evidence suggests that although emissions trading is no panacea, well-designed programs that are targeted at pollution problems appropri-ate for this form of control are beginning to occupy an important and du-rable niche in the evolving menu of environmental policies. This economic idea has come of age. Notes 1. Because of limitations of space, only a small sampling of the operating pro-grams can be mentioned here. Emissions trading has been used in many other Tietenberg p 56 contexts, including the RECLAIM program in the greater Los Angeles area (Hall and Walton 1996), the program to phase out lead in gasoline (Nussbaum 1992), the NOx Budget Trading Program in the Northeast (Farrell 2001), reducing or eliminating ozone-depleting chemicals (Stavins and Hahn, 1993) emissions averaging of industrial toxics (Anderson 2001), and controlling particulates in Santiago, Chile (O’Ryan 1996; Montero et al. 2002). 2. One example is the use of these revenues to allow a lowering of income tax rates, thus reducing the distortions associated with taxing income. References Anderson, R. C. (2001). The United States Experience with Economic Incentives for Pollution Control. Washington, D.C.: National Center for Environmental Economics. Atkinson, S. E., and T. H. Tietenberg (1982). “The Empirical Properties of Two Classes of Designs for Transferable Discharge Permit Markets.” Journal of Environmental Economics and Management 9(2): 101–121. Baumol, W. J., and W. E. Oates (1971). “The Use of Standards and Prices for Pro-tection of the Environment.” Swedish Journal of Economics 73: 42–54. Bovenberg, A. L., and L. H. Goulder (2001). “Neutralizing Adverse Impacts of CO2 Abatement Policies: What Does It Cost?” In Behavorial and Distribu-tional Effects of Environmental Policy, ed. C. E. Carraro and G. E. Metcalf. Chicago: University of Chicago Press: 45–85.
eBook - PDFGreen Taxation in Question
Politics and Economic Efficiency in Environmental Regulation
- C. Daugbjerg, G. Svendsen(Authors)
- 2001(Publication Date)
- Palgrave Macmillan(Publisher)
Daugbjerg et al., Green Taxation in Question © Carsten Daugbjerg and Gert Tinggaard Svendsen 2001 138 Green Taxation in Question is the shift in property rights from public authorities to the polluter. Under permit trading, permits are now transferable in contrast to standards where permits are non-transferable. This distribution rule of grandfathering has for example been used in the American `Acid Rain Program' and also forms the basis of the Kyoto Protocol. Therefore, the known experiences from the Acid Rain Program may guide the design of international permit trading follow- ing the Kyoto Protocol. As noted by others, the Acid Rain Program is the first large-scale and long-term environmental programme to rely on permit trading to combat pollution and this landmark experiment comes at a particularly important time `since emission trading is under serious consideration, with strong US backing' for dealing with global climate change and `the economic stakes in climate change surpass those in acid rain by several orders of magnitude'. 1 Hence, the United States has strongly advocated the idea of global CO 2 trade because it has had positive national experiences with buying and selling environmental permits. Thus, the fact that permit trading works makes it worthwhile to consider its use in relation to the widely discussed Kyoto Protocol. The political economy of the Kyoto Protocol, which deals with global climate change and the influence of industry and environ- mental groups, has not yet been analyzed (Boom and Svendsen 2000a). Our main contribution is, therefore, to put forward sugges- tions as to the future design of international permit trade following the Kyoto Protocol. When looking at the potential design of international CO 2 trade following the Kyoto Protocol, the first issue is to find out what trade level is politically feasible? 2 Overall, two main alternatives can be considered.
eBook - ePubEnvironmental Principles and Policies
An Interdisciplinary Introduction
- Sharon Beder(Author)
- 2013(Publication Date)
- Routledge(Publisher)
Firms that reduce the rate of emissions from a particular facility can sell the credits they earn to other firms which are not otherwise able to comply with emission regulations, or for whom buying credits is cheaper than reducing emissions to comply with the regulations. Trading is usually open to all firms. The money that can be earned from selling credits is supposed to provide an incentive for firms to come up with innovative ways to reduce their emissions rates.Some open market emission trading schemes allow firms to gain credits from reducing pollution from a variety of small mobile sources such as old cars, leaf-blowers and lawnmowers. Credits can be exchanged between different types of sources and industries, and in some cases different types of pollutants are covered under the one scheme so that reductions in emissions of one chemical can be used as credits for increased emissions of another.The trade is done through an Emission Trading Registry, which acts like a clearing house. These registries do not usually check whether the emission reduction credit is valid or legitimate, however – it is up to the buyer to do that (Leonardo Academy 2005).The ‘creator’ or ‘generator’ demonstrates that they have exceeded their regulatory requirements and that the reductions are ‘surplus’. They describe the steps they have taken or technology they have installed to reduce their emissions to show they are ‘real’ and the result of an emission reduction activity. They document their emissions before installing the technology, document their emissions after the technology is installed, and, using accepted engineering practices, ‘quantify’ the emissions in a workable and replicable manner. They must also show the reductions are ‘permanent’ for the life of the emission reduction program. (Clean Air Action Corporation 2002: 13)The US EPA developed a model for this type of trading, the Open Trading Market Rule, which was adopted in 2001 when it was incorporated into the EPA’s Economic Incentive Program (Clean Air Action Corporation 2002: 24).Tradeable water pollution rights
Tradeable pollution rights can also be applied to water. This is mainly done in the USA and Australia, and often applied only to nutrient loads (nitrogen and phosphorus) in discharges to water. Nutrient trading is being considered for the Danube Basin in preparation for an increase in industrial activity in the countries of Eastern Europe as their economies grow (Hawn 2005b). The OECD (cited in Robinson & Ryan 2002: 24) has suggested that water trading markets are necessarily limited because of:
eBook - PDF- Jeremy Moss(Author)
- 2015(Publication Date)
- Cambridge University Press(Publisher)
For instance, if we could assume that the next generation will be much better off than we are in non-climatic terms, it would affect the level of climate degradation that we would be entitled to allow, and, as a result, the acceptable global cap level. Consider then tradability, which is the focus of this chapter. Tradable quotas differ both from non-tradable quotas and from Pigovian taxes. Under a non- tradable, fixed quotas regime, a global cap is defined for each period and then decomposed into country-specific quotas that are not tradable. While it does not mean that the allocation should be uniform, it entails that countries are not allowed to emit beyond the limit allowed for by their quota. In contrast, when quotas are tradable, a country that can afford not to use up all its quota (e.g., because it has massively invested in green technology or because its economy has crashed) can sell its unused ones to another country. The latter is then allowed to emit beyond its own quota in the same proportion. The other alternative consists in approximating the desired global cap through a Pigovian tax. As for the fixed quotas and the tradable quotas scheme, the imposition of a tax limits emissions. Both tradable quotas and a tax system are referred to as incentive-based. The main difference is that, if complied with, a quota system guarantees that a given global level of emissions will not be crossed. No such guarantee obtains with a tax scheme, notwithstanding the fact that a Pigovian regulator will of course try to anticipate which tax rate will lead to the desired total amount of emissions. While the tax fixes the price and lets quantities adjust, the tradable quotas scheme fixes the quantity and lets the price adjust. While tradable quotas are more flexible than fixed ones, they should not necessarily be seen as tools to deregulate a previously regulated domain.
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