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Incentive-Based Regulation: Practice. Introduction: Cap & Trade  Cap-and-trade programs have helped reduce the costs of phasing out both leaded gasoline.

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Presentation on theme: "Incentive-Based Regulation: Practice. Introduction: Cap & Trade  Cap-and-trade programs have helped reduce the costs of phasing out both leaded gasoline."— Presentation transcript:

1 Incentive-Based Regulation: Practice

2 Introduction: Cap & Trade  Cap-and-trade programs have helped reduce the costs of phasing out both leaded gasoline and the production of CFCs  Victory has been less clear in reducing urban air pollution; a proposed cap & trade system for mercury has been scrapped due to hot spot concerns.  The cap-and-trade program to reduce sulfur dioxide has been a big success.  Europe is leading on global warming with the ETS cap & trade program; northeastern and western states have passed laws requiring similar programs.  In 2010, the US failed to pass its own cap & trade for CO2. The EPA is moving forward with CAC regulation of US greenhouse gasses.

3 Introduction: Pollution Taxes  Classic pollution taxes are used very little in the US with the exceptions of fees levied on sewage and solid and hazardous waste; British Columbia has introduced a carbon tax  Several European countries have had broader experience with taxes, but none relies on them as an exclusive means of pollution control

4 Reducing Lead in Gasoline: The first success story  To reduce lead in gasoline, the EPA tightened lead standards  EPA instituted its 1980’s lead banking program to ease compliance costs. Widespread participation.  Costs savings: 10% over a CAC approach  The program helped achieve the more stringent lead standards cost-effectively

5 Underlying Factors of this Success  Because all refiners were granted permits based on their performance, market power did not emerge  Markets were not thin, since trading was nationwide  Because the permits were shrinking, the issue of permit life did not emerge  Hot spots did not persist  Monitoring and enforcement did not suffer since lead content in gasoline was already reported by refiners on a regular basis

6 Chlorofluorocarbons  In 1988, the EPA introduced a similar trading program for chlorofluorocarbons (CFCs)  CFCs are being phased out globally with relative success  Congress also imposed a tax, which has encouraged consumers to switch to substitute products

7 Trading Urban Air Pollutants  Attempts to implement tradable permit systems at the local level for criteria air pollutants have a mixed record  The nation’s three marketable permit experiments EPA’s Emissions Trading Program L.A. Basin’s RECLAIM and mobile emissions trading programs East coast Nox trading.

8 Emissions Trading Program  Initiated in 1976, allows limited trading of emission reduction credits for five criteria air pollutants: VOCs,Carbon monoxide,Sulfur dioxide, Particulates, Nitrogen oxides  Credits are earned for controlling emissions beyond the standard These credits can then be traded or banked for use in one of three trading programs

9 Trading Programs Offsets ○ Designed to accommodate the siting of a new pollution sources in non-attainment areas Netting policy ○ Allows trading within a single plant: has had a significant impact on compliance costs Bubble policy ○ Allows trading within a limited geographical area

10 Problems with the Bubble Program Thin markets greatly reduced the effectiveness of emissions trading Hot-spot problem with non-uniformly mixed pollutants Increased transaction costs under the bubble program

11 RECLAIM  Regional Clean Air Incentives Market in California is a textbook cap-and-trade system Tremendous excess supply of permits (for political buy- in) led to a slow start RECLAIM requires continuous emissions monitoring and electronic reporting California energy crisis in 2002 increased NO x permit prices so much that California returned to a CAC program. RECLAIM highlighted a new complication with cap & trade: the potential for PRICE VOLATILITY. In 2005, RECLAIM got back on track, with a second round of cuts scheduled.

12 Reported Emissions and Allowances Under RECLAIM: NOX Sources: See text

13 California’s Clunkers  Stationary sources can purchase and scrap highly polluting vehicles and obtain pollution credits to avoid clean-air upgrades at their plants Increases hot spots; environmental justice concerns. Strong incentives for, and problems with fraud. President Obama took the program national in 2008 as a measure to stimulate auto sales in the face of the recession.

14 Marketable Permits and Acid Rain  Sulfur dioxide and nitrogen oxide are transformed while in the atmosphere into sulfuric and nitric acids  Problems: Damage to water and forest resources Erosion of buildings, bridges and statues Reduced visibility Sickness and premature death in humans

15 Acid Rain Legislation  The 1990 Clean Air Act capped emissions at 1986 levels. Permits were grandfathered. Broad, nationwide markets, prevent market power SO 2 NO x are uniformly mixed on a regional basis, so no major hot-spots The permits confer no tangible property rights, but industry can expect at least another decade’s worth of trading Mandated the installation of continuous monitoring equipment Provided some compensation for job losses

16 Performance of the Acid Rain Market Emissions from participating plants have fallen sharply since 1995; very little non-compliance Ambient levels of SO 2 have declined Based largely on health benefits, the acid rain program easily passes an efficiency test

17 Performance of the Acid Rain Market  Big surprise: dramatic cost savings Not due primarily to short run cost-effectiveness from inter-firm trading. Instead due to “long run” changes in technology (which actually happened quite quickly…) Most firms switched to low sulfur coal or developed new fuel blending techniques rather than installing expensive scrubbers

18 Inter-Firm Permit Trade Under the Acid Rain Program

19 Latest Developments: Europe The European Trading System: ○ Continent-wide Cap & Trade as part of Kyoto compliance ○ Allows for “offset” trading with developing countries as part of the Clean Development Mechanism ○ Concerns about monitoring and enforcement ○ Judged an initial success, despite price collapses at several points.

20 Price Volatility in the ETS: Rationale for a “price collar” Source: See text

21 Latest Developments:US  Bush Admin proposal for cap & trade for mercury from coal plants scrapped due to concerns about potential hot spots  California (and western states) Legislation requiring Cap & Trade for CO2 has passed– details still being worked out. Under Proposition challenge in 2010 California elections.  Northeastern and mid-atlantic states Regional Green House Gas Initiative (RGGI) Only functioning Cap & Trade system for CO2 in the US. Moderate cap on emissions from the electricity sector; many states moving towards 100% auction of permits. Offsets allowed.

22 US Cap & Trade?  In 2009, US House passes “Waxman-Markey” Bill: 17% below 2006 by  Innovation: consumer protection against rising electricity prices Permit giveaways to regulated electricity distributors, required to pass on the value to consumers. Large scale investments in energy efficiency: even as electricity prices rise, bills fall. Large “offset” market, especially in out years when compliance costs would rise.  Senate fails to pass a bill. No US action in 2010.

23 Pollution Taxes in the United States  An increasing number of municipalities have begun experimenting with “unit pricing”, instead of a lump sum fee, to reduce waste flows  One study found that unit pricing Reduced generated waste by 10% Reduced waste flow to landfills by 30% Reduced waste management cost by 10% The communities also increased curbside recycling

24 The Seattle Stomp  Seattle’s unit pricing program was studied between 1985 and 1987  Seattle raised rates substantially over the years of the study  In response, Seattle residents increased trash compaction in what came to be known as the “Seattle Stomp”  This suggests that without a good substitute (curbside recycling), waste disposal is fairly price inelastic

25 Pollution Taxes Outside of the US  British Columbia has a carbon tax, as do several European countries.  Germany, France, and the Netherlands have instituted effluent charges for water pollutants  Effluent tax systems are grafted on to CAC systems, which mandate standards and control technologies

26 Lessons from Europe  In all cases, taxes were introduced at low levels and then slowly raised  The real value of taxes has not been eroded by inflation  European countries typically direct the funds raised from pollution taxes on water into investments in improved water quality

27 Indirect Pollution Taxes  One strategy to reduce pollution is to tax it indirectly by, for example, taxing pesticides  Indirect pollution taxes can generate counterproductive results– a pesticide tax for example, might discourage new, relatively benign products from entering the market.  The potential for unintended perverse effects means that a direct tax on the pollution from pesticides is preferred to an indirect tax on the product.  Direct pollution taxes are theoretically appealing, but indirect taxes are often more feasible.

28 Indirect Taxes on CO2

29 Other Incentive-Based Approaches  User fees for public lands  Environmental bonds  Insurance and liability requirements


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