1. Emissions trading end of the world Greg Barrett Economics Lecturer University of Canberra Carbon cycle ecology Objectives Theory Practice

2. Carbon Cycle Asset Atmosphere 750 Gt carbon (stock) +3 Gt pa (flow) Asset Plants 600Gt Soil 1600Gt Oceans 40,000G t Asset Fossil fuel 3300 Gt Flow Deforestation 2 Gt pa Flow 4 Gt pa Flow burning 5 Gt pa

3. Greenhouse Response (damage function) Ambient level W>A emission (dose)

4. CO 2 concentrations parts per million 1800s 290 1960315 1988350 2005379

5. Allen Kneese Opposed Direct regulation Subsidies Supported recycling green taxes tradable permits ethics

6. Ethics Who polluted most? Who is responsible? Who should pay?

7. Objectives Effectiveness: reduce pollution regulate quantities o government Efficiency: minimise pollution cost price externality o green taxes Efficiency & Effectiveness emissions trading o market

8. Production & consumption externalities output & W S P S S S D P DSDS D S production consumption MEC MNPB X S XSXS X P X P X P X A X S P S P S P S P P P P $ $ $

9. EU air pollution Shorter life span 8.6 months o cardiovascular & respiratory diseases Policy ( Clean Air for Europe ) save 2.3 months worth 161 billion euros a year

10. Productive efficiency Regulating quantity by licensing MAC 3 1 2 S 2 t2t2 t3t3 t1t1 $/t tons of abatement

11. Marketable permits Definition Property rights Tradeable license o to pollute or extract resource Allocation ownership initial allocation o grandfathering vs auctions reallocation over time

12. Productive efficiency MAC 3 1 2 S3S3 S2S2 S1S1 t2t2 t3t3 t1t1 $/t tons of abatement Green emissions tax Allowing trading of licenses

13. Fox River Discharger Impact MAC MC/DO coeff $US/lb $US/µg/l 1 107 7.20 72 2 189 2.10 11 3 373 1.90 5 4 231 3.10 14 5 184 1.80 11 6 214 7.90 37 7 101 2.60 27

14. Examples Resource license trading fishing quotas irrigation licenses Pollution emissions trading SO 2 1970 USA lead 1985 USA SO 2 1990 USA CFCs Australia Salt 2004 NSW CO 2 2003 NSW CO 2 2005 EU CO 2 2008 NZ

15. Tradeable permits Advantages Savings in compliance costs. Allows new polluters to buy quota from old (economic growth). Flexible limits total emissions o target can be adjusted o pollution outcome certain o target area -bubbles lower abatement cost adjusts to economy Appropriateness Compliance costs vary Sufficient trades & traders Fixed polluters. Encourages technological change Needs market intermediation Environmental impact same Problems multiple pollutants Concentrating polluters Economic rents accrue to polluters High transactions costs Needs a sophisticated market set up & administration costs low usage Relevance to environmental media

16. Acid Rain Program SO 2 Allowances Transferred

17. Price of Sulfur Dioxide Allowances reduction in allowances initially o price not increasing – Technological change? long-run o price rise

18. Outcomes percentage change “heat input,” = combustion of fossil fuels * Generation from fossil fuel-fired plants. ** Constant year 2000 dollars adjusted for inflation. Source: Energy Information Administration (electricity generation, retail price); EPA (heat input and emissions, representing all affected ARP units), 2007

19. NSW Benchmark Scheme Fine of $10.50/t CO 2 NSW electricity retailers Pollution permits (NGSC) renewable energy, forests

20. EU ETS trading problems Permits not traded grandfathering Market segmented Clean Development Mechanism Over allocated imperfect information Time frame too short long-term investments Outcome: price $US/t CO 2 e 200523 2006 22 2007 0 2008 27 target 20-50 Cost 0.1% of GDP per year

21. Conclusion Political decision regulate price or quantity create property rights Practical solution costs are modest learn from experience Institutions important market institutions o brokers o auctions o fines o information