Transcript AGEC/FNR 406 LECTURE 17 Tradable Pollution Permits 1975 the U.S. EPA started an Emissions Trading Program to reduce air pollution. Support for this market-based.

AGEC/FNR 406
LECTURE 17
Tradable Pollution Permits
1975 the U.S. EPA started an Emissions
Trading Program to reduce air pollution.
Support for this market-based approach has
grown both among businesses and
environmentalists.
What is a tradable permit?
Flexible approach to reaching target level of pollution
Any source that reduces emissions more than required
receives an “emission reduction credit” (ERC).
ERCs can be used to satisfy emission targets at other
discharge points for which the MAC is higher.
ERCs can transferred or sold, thus allowing sources to
find the cheapest means to controlling emissions.
Policy context
ERC is “currency”
Policies governing use include:
Offset policy: firm uses ERC to continue
polluting at another source
Bubble policy: total emissions within “bubble”
are regulated, trade within is OK.
Emissions banking: firm can “stockpile” ERCs
Applications
Air pollution (1975)
Lead in gasoline (1982-1987)
CFCs and other ozone-depleting chemicals (1988-)
SO2 Acid rain (1993-)
Mobile sources (1993-)
Greenhouse gases (proposed)
Polluter behavior with regulation:
Specify 4 units of emission each
Costs
Costs
MAC = 10 - E1
MAC = 8 - 2 E2
C1=6
18
C2=0
E1=4
EU=10
E2=4
Polluter behavior with permit
1. Total Target Emission Level = 8,
so E1 + E2 = 8
2.
Set MAC1=MAC2 and solve.
10 - E1 = 8 - 2E2
10 - E1 = 8 - 2(8-E1)
10-8+16 = 3 E1
18 = 3 E1
6 = E1
Polluter behavior with permit:
firms determine allocation of emissions
Costs
Costs
MAC = 10 - E1
MAC = 8 - 2 E2
C2=4
C1=4
8
E1=6
4
EU=10
E2=2
EU=4
Key messages:
1. Target Emission Level is reached.
2. Total cost of abatement is lower
(12 vs. 18)
3.
Optimal allocation is reached
where firms equate MACs.
4.
Permits allow low-cost firms to
abate more than they otherwise would.
Implementation Problems:
1. Transaction costs
2.
Spatial considerations
3. Temporal considerations
4.
Market power
5.
Environmental justice (equity)