1 Topic 3.c: Tradable emission permits We have seen that tradable pollution permits compare favorably with other policy instruments we have considered. To what extent do we see this policy being used in practice? In Canadian environmental policy? N o… What about in the US? –Large national program regulating SO 2 emissions. US Acid Rain Program –Also some smaller scale (local) programs

2 Topic 3.c: Tradable emission permits Global policy? –Tradable pollution permit scheme (ETS) is an integral part of the Kyoto Protocol designed to address problem of global warming. –EU has developed a trading scheme for CO 2 emissions to help them achieve their Kyoto targets US Acid Rain program: –Began in phased in over a number of years. –Regulated the largest electric power utilities, the large sources of SO2 emissions in the US. –SO2 is primary cause of acid rain.

3 Topic 3.c: Tradable emission permits Known as a “cap and trade” program: –Emissions capped at (about) 50% of 1980 levels. –Initially, permits issued to individual firms based on historic emissions levels. –US Environmental Protection agency (EPA) auctions permits each year. –Permits are also bought and sold in secondary markets.

4 Topic 3.c: Tradable emission permits How successful has the policy been? Enormously so, according to most commentators. Environmental goals achieved: –Huge reduction in SO 2 emissions. –Acid rain has decreased –Though it will take time for the affected ecosystems to recover

5 Topic 3.c: Tradable emission permits But the environmental outcome is a function of the overall level of emissions reductions. –50% reduction is huge. –We could have achieved this through E standards (“cap and no trade”). –Recall that the advantage of trading is it allows us to achieve the target at lower cost than not trading. What is the evidence on the abatement cost savings from the trading system? –Difficult to answer this exactly (we really don’t know what each and every power plant’s MAC curve looks like).

6 Topic 3.c: Tradable emission permits However, evidence does suggest that the program has achieved policy goal (reduction in SO 2 emissions) at: 1.MUCH lower cost than standards; –Trading was strong even early on the program (indicating differences in MACs across firms). –One (old) estimate: permit trading has resulted in costs savings of $225-$375 million (US). –Means that trading reduced compliance costs to between 33% and 50% of what they would have been with E standards.

7 Topic 3.c: Tradable emission permits 2.Significantly lower cost than had been EXPECTED. –Early projections were that (on average) each tonne of SO 2 could cost as much as $600 to abate. –Have seen (from permit prices) that actual abatement costs have been much lower. Average cost over the life of the program (pre-2005): $187-$307/tonne. –Difference in actual costs relative to projected costs in part due to incorrect projections about how abatement would happen “scrubbing” versus “switching” (low sulfur coal)

8 Topic 3.c: Tradable emission permits –Points to the flexibility of permit trading schemes: allow the firms themselves to figure out what’s the cheapest way to get there, by making that an imperative for them. US Acid Rain Program  large cost savings relative to –Emissions standards; and –Expectations.

9 Topic 3.c: Tradable emission permits One concern early on was the possibility of hot-spots. If high MD firms are also high MAC firms, and if these are clustered geographically, then we might not reduce emissions by enough in some areas to meet environmental goals. Hot-spot problems were avoided in the SO 2 program, in part simply because emissions reductions were so large. Another US tradable pollution permit program in which hotspots were a concern: RECLAIM policy in Southern California.

10 Topic 3.c: Tradable emission permits RECLAIM policy: Tradable permit system for SOx, NOx, ROG in the LA Basin. Much smaller scale than the SO 2 program (regional in scope, even small polluters subject to regulation). Overall goal: 50% aggregate reduction. Implementation began in 1994, more or less completely operational policy now. Unique geography of the LA Basin makes hotspots a concern. –There needed to be reductions in regions near the coast, as well as regions inland towards the mountains. RECLAIM deals with this through zoning system: –2 zones - coastal and inland. –No permit trading between zones.

11 Topic 3.d: Other Market-based Instruments “Market-based instruments” (sometimes called “incentive- based instruments” or “economic instruments”) refers to policies that put a price on sources of environmental damage. These include: –emission fees –tradable emission permits –deposit-refund schemes –security deposits

12 Topic 3.d: Other Market-based Instruments 1.Deposit-refund schemes Traditionally and widely used on beverage containers, principally to reduce littering. A deposit is paid on the container at time of purchase and this deposit is refunded when the container is returned. A deposit-refund scheme is also used in some jurisdictions for car tires and batteries, and for used engine oil and paints.

13 Topic 3.d: Other Market-based Instruments 2. Security deposits A security is posted with the regulator prior to the conduct of an activity with which there is an associated risk of environmental damage. The security is forfeited if damage occurs; it is refunded otherwise. The purpose of the security is to elicit precautionary action from the regulated agent.

14 Topic 3.d: Other Market-based Instruments Example applications for security deposits: –oil tankers may have to pay a security prior to entering a harbor –a developer may have to pay a security on the proper functioning of a sewage disposal system –a hazardous waste transporter may have to pay a security to the jurisdictions through which the waste is being transported