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Emissions trading end of the world Greg Barrett Economics Lecturer University of Canberra Carbon cycle ecology Objectives Theory Practice
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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
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Greenhouse Response (damage function) Ambient level W>A emission (dose)
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CO 2 concentrations parts per million 1800s 290 1960315 1988350 2005379
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Allen Kneese Opposed Direct regulation Subsidies Supported recycling green taxes tradable permits ethics
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Ethics Who polluted most? Who is responsible? Who should pay?
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Objectives Effectiveness: reduce pollution regulate quantities o government Efficiency: minimise pollution cost price externality o green taxes Efficiency & Effectiveness emissions trading o market
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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 $ $ $
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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
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Productive efficiency Regulating quantity by licensing MAC 3 1 2 S 2 t2t2 t3t3 t1t1 $/t tons of abatement
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Marketable permits Definition Property rights Tradeable license o to pollute or extract resource Allocation ownership initial allocation o grandfathering vs auctions reallocation over time
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Productive efficiency MAC 3 1 2 S3S3 S2S2 S1S1 t2t2 t3t3 t1t1 $/t tons of abatement Green emissions tax Allowing trading of licenses
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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
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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
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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
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Acid Rain Program SO 2 Allowances Transferred
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Price of Sulfur Dioxide Allowances reduction in allowances initially o price not increasing – Technological change? long-run o price rise
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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
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NSW Benchmark Scheme Fine of $10.50/t CO 2 NSW electricity retailers Pollution permits (NGSC) renewable energy, forests
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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
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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
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