Exam 2

Question 1

Possible uses of tax revenue

Answer 1

lower other taxes (income taxes)

Subsidies for clean energy

Question 2

Why was BC able to pass tax?

Answer 2

1. intense voter interest in the issue of climate change
2. the presence of a right-center majority government
3. strong commitment by BC Premier Gordon Campbell
4. a political institutional structure that gives great power to the leader of the party with a majority of seats in the legislature, as was the case with Campbell and his party.
5. Availability of renewables; hydro

Question 3

Different ways permits are allocated

Answer 3

Free- grandfathered

Emissions up to the allocated level are free

Equal allocation

According to past emissions

Auctioned

Every unit of emissions has a cost

Exactly like a carbon tax

Question 4

Tax vs Cap and Trade

Answer 4

The tax system is mature and universal.

Fiscal deficits

revenues go to the government

hard to pass easy to cut

Limited experience with cap and trade

no international experience

free permits traditionally

Question 5

RGGI price volatility

Answer 5

changing the supply and price of permits based on if the price gets to high (CCR) or low (ECR)

Question 6

Why did EU-ETS permit market fail

Answer 6

price instability due to overallocation, grandfathering, and banking of allowances

Question 7

double dividend

Answer 7

Dual benefit from revenue-neutral carbon taxation

Reduction in DWL by correcting for negative externalities

Reduction in DWL by correcting from DWL from income taxation

Question 8

Dual Market Failure Problem

Answer 8

There are negative externalities of gasoline that are inefficient in the market and the positive externalities in the EV R&D are inefficient. So you tax the negative and subsidize the positive.

Question 9

Cap and Trade Components

Answer 9

Cap sets a maximum on the amount of pollution that can be emitted. Trade allows firms to trade permits to less efficient firms

Question 10

Energy Efficiency Gap

Answer 10

slower than the socially optimal rate of diffusion of energy-efficient products

decisions about energy efficiency reflect a slower diffusion of energy-efficient products than would be expected if consumers made all positive net present value investments

Question 11

Market Failure Explanations

Answer 11

Imperfect Information

Principal Agent Issues

Credit Constraints

Learning by Using

Regulatory Failures

Question 12

Principle-Agent Issues

Answer 12

One party makes a decision relating to energy use, but another party pays or benefits from that decision

Question 13

Regulatory Failures

Answer 13

Economic regulation of electricity markets results in prices that differ from marginal costs, this difference can distort incentives for investment in energy efficiency.

Question 14

Behavioral Failures

Answer 14

Nonstandard Preferences

Self Control Problems (unfulfilled plans to do the beneficial thing)

Reference Dependent (outcome utility based on reference point)

Nonstandard Beliefs

Incorrect beliefs about the future

Nonstandard Decision Making

Limited Attention (consumers under weigh)

Framing of Choices

Sub-optimal decision heuristics (rules of thumb)

Question 15

Policies to Adress Market Failures

Answer 15

Pigouvian Tax

Information Provision

Pigouvian Subsidy

Improve regulation

Question 16

Policies to address Behavioral Failures

Answer 16

Information Provision

Clarify trade-offs

focus on losses instead of gains

Nudges (if don’t work use product standards and subsidies)