L7: Instruments; Criteria 1-5

Question 1

Why is choosing a instrument to reach a target difficult?

Answer 1

Because the government has multiple objectives and the implementation of policies/instruments can have multiple/unintended consequences

Question 2

How are policy instruments selected?

Answer 2

Using the criteria for selection of pollution control

Question 3

How many criterion are there in the the criteria for selection of pollution control?

Answer 3

9

Question 4

Name the criteria for selection of pollution control

Answer 4

Cost-effective
Long run effects
Efficiency
Ancillary benefits? Double dividend in the future
Equity
Dependability
Flexibility - adaption in the future
Costs under uncertainty
Information requirements

Question 5

What do the final 4 criterion relate to in the pollution control criteria?

Use of any of these instrument will involve ____ Choice will depend on the relative
_____ attached to the criteria
(ii) _____ will vary for different pollutants
(iii) No single ____ is a panacea

Answer 5

Final 4 relate to decision making where the policy maker has limited info or there is uncertainty

Use of any of these instrument will involve trade-offs. Choice will depend on the relative
weights attached to the criteria
(ii) Weights will vary for different pollutants
(iii) No single instrument is a panacea

Question 6

Cost efficiency occurs when (2)?

Usually we have many sources of an ___, and so many potential ____. Thus, the question is how do we ___ the overall target across sources?

Answer 6

Lower real cost than others
✓ Minimum opportunity cost

Usually we have many sources of an emission, and so many potential abaters. Thus,
the question is how do we share the overall target across sources?

Question 7

What is the Least Coast Theorem of Pollution Control?

Answer 7

Least Coast Theorem of Pollution Control: Cost of abatement equalised over all abaters

Question 8

What 2 other important results emerge besides the LCT:

1) What will the least cost solution not involve/require
2) What happens when abatement costs differ?

Answer 8

(i) A least cost solution will not in general involve equal abatement effort
(ii) Where abatement costs differ, cost efficiency implies that relatively low-cost abaters will undertake most of the total abatement effort, but not all of it

Question 9

There are three broad categories of environmental policy instruments:

Answer 9

(i) Institutional approaches to facilitate internalisation
(ii) Command and control instruments
(iii) Economic incentive market based instruments

Question 10

Institutional approaches:

Why are Efficient bargaining outcomes are hard to achieve? 1

Answer 10

Reasons: enforceable property rights do not exist;

Question 11

Institutional approaches:

When can enforceable property
rights exist?

Answer 11

facilitated if there are a small number of affected parties who can be identified

Question 12

Institutional approaches:

How can the government intervene to help?

Answer 12

Where it is cost effective government should facilitate establishment of property rights e.g. take responsibility for environmental monitoring to identify
polluters and victims then disclose information

Question 13

Institutional approaches:

Success may also rely on the development of ____ _____

EG? 1

Answer 13

Success may also rely on the development of social responsibility (sensitisation and
awareness campaigns?)

Question 14

What are the two types of command and control Approaches?

Answer 14

REGULATION OF THE QUANTITIES
Limits on the inputs used > affects the production technique > manages the quantity of goods produced > Emissions output

REGULATION OF THE PRODUCTION PROCESS
Implimentations on the input restrictions > technology controls > manages output with quotas > emissions licences (which can be traded)

Question 15

In the regulation of quantities method of C&C, amount (and type) of emissions depend on the _____, ____ ____used, and the ___ and ____of inputs being used. For uniformly mixing pollutants (UMPs), pollution depends only on ___ ____ levels. For non-uniformly-mixing pollutants (dotted lines) the spatial distribution of ambient pollution levels will also depend on ____ of ___ ___

Answer 15

In the regulation of quantities method of C&C, amount (and type) of emissions depend on the goods produced (quantities), production techniques used, and amount (and mix) of inputs being used. For uniformly mixing pollutants (UMPs), pollution depends only on total emissions levels. For non-uniformly-mixing pollutants (dotted lines) the spatial distribution of ambient pollution levels will also depend on location of emission sources.

Question 16

In B, regulations (designed to interfere at any of the stages A) may apply to ____ of
emissions themselves, to the ____ of final production, to ___ ___used, or to the level and/or mix of ___ ____. For non-UMPs, controls may also apply to
_____ of emission sources.

Answer 16

In B, regulations (designed to interfere at any of the stages A) may apply to outputs of
emissions themselves, to the quantity of final production, to production techniques used,
or to the level and/or mix of productive inputs. For non-UMPs, controls may also apply to
location of emission sources.

Question 17

Give 4 examples of C&C instruments?

Answer 17

Non-tradeable licences
Productions technique restrictions
Minimum technology requirements
Location

Question 18

Non-transferable licences

EPA creates licences to achieve ___ level of pollution. Each firm’s initial allocation of ____ determines its ___ allowed level of ____
▪ Success unlikely if polluters believe that their actions are ___ ____. Must be supported by ____ systems
▪ If EPA knew each polluter’s ___ ____ function it could calculate the level of _____for each firm which would satisfy the ___ ____ ___
▪ EPA lacks such knowledge so not ____ efficient. Problem of information _____ involved with gaining this info. No incentive for a firm to provide the regulator with info about its ____ _____ in an unbiased form
▪ Long-term relationship could remove the asymmetries but high _____ _____ and regulatory ____.

Answer 18

Non-transferable licences

EPA creates licences to achieve target level of pollution. Each firm’s initial allocation of
licences determines its max allowed level of emissions
▪ Success unlikely if polluters believe that their actions are not observed. Must be
supported by monitoring systems
▪ If EPA knew each polluter’s abatement cost function it could calculate the level of
emissions for each firm which would satisfy the LCT
▪ EPA lacks such knowledge so not cost efficient. Problem of information asymmetries
involved with gaining this info. No incentive for a firm to provide the regulator with info
about its abatement costs in an unbiased form
▪ Long-term relationship could remove the asymmetries but high admin costs and
regulatory capture.

Question 19

Minimum technology requirements

▪ Specifying required characteristics of ____ processes or ____. Usually not cost efficient because they do not focus on _____ effort of polluters.
- What do these stand for? (BPM), (BAT) (BATNEEC)
▪ The technology requirements restrict the ____ set of the firm to reduce ____
▪ Decisions about emissions reduction are effectively being centralised to the ____
▪ Better left to the firm who will choose the same method of reducing emissions if it is the ___ ____ ____

Answer 19

Minimum technology requirements

▪ Specifying required characteristics of production processes or capital. Usually not cost efficient because they do not focus on abatement effort of polluters.
- best practicable means (BPM), best available technology (BAT) and best available technology not entailing excessive cost (BATNEEC)
▪ The technology requirements restrict the choice set of the firm to reduce emissions
▪ Decisions about emissions reduction are effectively being centralised to the EPA
▪ Better left to the firm who will choose the same method of reducing emissions if it is the least cost method

Question 20

Location

Pollution control objective is reducing ___ ____ to pollutants, could be met by separating the locations of _____and ____ ____.
▪ Relevant where the pollutant is ____ ___ mixing, so that its effects are ____ ____.
▪ Separation can be done ___ ___ or ___ ___.
▪ Separation ex ante, by ___ or ___ control, is relatively common.
▪ Ex post _____ decisions are rarer because of their draconian nature; examples include people being removed from heavily ____ areas, such as Chernobyl.

Answer 20

Location

Pollution control objective is reducing human exposure to pollutants, could be met by separating the locations of people and pollution sources.
▪ Relevant where the pollutant is not uniformly mixing, so that its effects are spatially differentiated.
▪ Separation can be done ex ante or ex post.
▪ Separation ex ante, by zoning or planning control, is relatively common.
▪ Ex post relocation decisions are rarer because of their draconian nature; examples include people being removed from heavily contaminated areas, such as Chernobyl.

Question 21

Economic incentive instruments- quasi market

▪ Create ___ for individuals or firms to ___ change their behaviour

▪ ____, ____ and ___ ____create markets for the pollution externality

▪ Prices generate ____ ____ that profit-maximising firms will take account of in
their behaviour.

Answer 21

Economic incentive instruments- quasi market

▪ Create incentives for individuals or firms to voluntarily change their behaviour

▪ Taxes, subsidies and transferable permits create markets for the pollution externality

▪ Prices generate opportunity costs that profit-maximising firms will take account of in
their behaviour.

Question 22

Emissions taxes and pollution abatement subsidies (1)

▪ Focusing on uniformly mixing pollutants (UMP) so damage created by an emission is independent of ___. Several points at which taxes could be applied in our flow charts

▪ Tax has been advocated for some time to meet a target, give 3 reasons:

(i)
(ii)
(iii)

▪ When we solve the net ___ ___ problem, we
obtain a ___ price. The tax on ____ should be set at this level.

Answer 22

Emissions taxes and pollution abatement subsidies (1)

▪ Focusing on uniformly mixing pollutants (UMP) so damage created by an emission is independent of location. Several points at which taxes could be applied in our flow charts

▪ Tax has been advocated for some time to meet a target:

(i) target is economically efficient;
(ii) other specific target;
(iii) target of some unspecified amount

▪ When we solve the net benefit max problem, we
obtain a shadow price. The tax on subsidy should be set at this level.

Question 23

Draw the emissions tax and pollution abatement subsidies graph - do not look at text bc of subseqent questions

Answer 23

slide 17

Question 24

The emissions tax and pollution abatement subsidies graph:

Under what conditions does the firm gain revenue from a subsidy?

What is the gov revenue from tax?
What is the net profit and what does the firm lose?

What is the area representing the cost of a tax on a firm?

Answer 24

slide 17

A firm gains revenue from a sub when the unit sub
exceeds its MAC. Loss of income from a tax on all units
of the pollutant

receives ADMM^ but firm loses profit of AM^M, net gain of ADM^

mu * M*

Question 25

The emissions tax and pollution abatement subsidies graph:

Such fixed or lumpsum payments are independent of
the amount of _____ and they may alter industry
_____ in the LR

Subsidy may enlarge the industry and offset the SR ____ ____.

▪ As the subsidy depends on the ____ level of emissions a firm has an incentive to ____ the uncontrolled level of emissions in order to obtain a
___ ____

Answer 25

The emissions tax and pollution abatement subsidies graph:

Such fixed or lumpsum payments are independent of
the amount of abatement and they may alter industry
profitability in the LR

Subsidy may enlarge the industry and offset the SR emissions reduction.

▪ As the subsidy depends on the uncontrolled level of emissions a firm has an incentive to misrepresent the uncontrolled level of emissions in order to obtain a
larger subsidy

Question 26

Draw the MCA and MBA graph

▪ Z is the level of abatement. MCA is the MB as what firms forgo in terms of profit is the benefit they receive from emissions.

Answer 26

Slide 20

▪ Z is the level of abatement. MCA is the MB as what firms forgo in terms of profit is the benefit they receive from emissions.

Question 27

EPA does not need to know the _ _ for each firm nor does it need to know the _ _ _ of each firm to achieve its target at least cost. With CAC, knowledge of each
firm’s _ _ _ is needed

▪ An unspecified ____ can be achieved without any knowledge of the MCA and MBA. The EPA could select an arbitrary level of ____, u

▪ Emissions reduction is achieved at __ ___ as all firms equate their MCA with the ___ ___. Government will not know in advance the level of ______ reduction

▪ Taxes and subsidies are ___ ___ instruments. However, they are different in terms of the ____ of the gains and losses. This may affect the LR level of
____.

Answer 27

EPA does not need to know the MD for each firm nor does it need to know the MCA of each firm to achieve its target at ____ ____. With CAC, knowledge of each
firm’s MCA is needed

▪ An unspecified target can be achieved without any knowledge of the MCA and MBA. The EPA could select an arbitrary level of ___, u

▪ Emissions reduction is achieved at least cost as all firms equate their MCA with the tax rate. Government will not know in advance the level of emissions reduction

▪ Taxes and subsidies are cost efficient instruments. However, they are different in terms of the distribution of the gains and losses. This may affect the LR level of
abatement.

Question 28

Marketable emissions permits:

Can be applied at many points in the production to pollution process

▪ The underlying principle is that any __ in emissions must be ___ by an equivalent ____ elsewhere.

▪ Based on a limit set on the ___ ____ of emissions allowed, but the regulator does not attempt to determine ____ that total allowed quantity is ____ among individual sources.

▪ Two broad types of marketable permit, the __-__-__ system and the ____ ____ ____ system ( ).

▪ The ____ is set and then trading can occur at whichever ____ is agreed

Answer 28

Marketable emissions permits:

Can be applied at many points in the production to pollution process

▪ The underlying principle is that any increase in emissions must be offset by an equivalent decrease elsewhere.

▪ Based on a limit set on the total quantity of emissions allowed, but the regulator does not attempt to determine how that total allowed quantity is allocated among individual sources.

▪ Two broad types of marketable permit, the ‘cap-and-trade’ system and the emission reduction credit system (ERC).

▪ The cap is set and then trading can occur at whichever price is agreed

Question 29

Marketable emissions permits:

Different from tax/subsidy because it works via ___ rather than __. Key feature is _____ which creates a market for the right to ___

▪ Right to ___ has a value. Creates an ___ ____ because a unit of pollution uses a permit

▪ Cost to a firm is the ____ ____ which suggests equivalence with tax/subsidy

▪ ____ are allocated and there will be differing ____ of the permits.

Answer 29

Marketable emissions permits:

Different from tax/subsidy because it works via quantity rather than prices. Key feature is transferability which creates a market for the right to pollute

▪ Right to pollute has a value. Creates an opportunity cost because a unit of pollution uses a permit

▪ Cost to a firm is the prevailing price which suggests equivalence with tax/subsidy

▪ Permits are allocated and there will be differing valuations of the permits.

Question 30

Marketable emissions permits:

Some firms hold more permits than the quantity of their ____ emissions. Marginal worth of a permit to this firm is ___ (assuming no banking)

▪ Others will hold _____ permits for their emissions. The marginal valuations of permits to these firms will depend on the _ _ _. Firm buys if price is less than the _ _ _.

Insufficient permits can result in the ___ of permits if the price is greater than the MCA. Trade until ? = ?

▪ MCA valuations differ between firms so a market forms for tradable permits and a single ____ ___ price will emerge . So in equilibrium MCAs will be equal across firms so it is a ___ ___instrument

▪ If total permits is M* then the system will generate an equilibrium price equal to the ___/___

Answer 30

Marketable emissions permits:

Some firms hold more permits than the quantity of their desired emissions. Marginal worth of a permit to a firm is 0 (assuming no banking)

▪ Others will hold insufficient permits for their emissions. The marginal valuations of permits to these firms will depend on the MCA. Firm buys if price is less than the MCA.

Insufficient permits can result in the sale of permits if the price is greater than the MCA. Trade until MCA=price

▪ MCA valuations differ between firms so a market forms for tradable permits and a single equilibrium market price will emerge . So in equilibrium MCAs will be equal across firms so it is a cost efficient instrument

▪ If total permits is M* then the system will generate an equilibrium price equal to the tax/subsidy

Question 31

Initial allocation of permits (auctions)

▪ Which 2 ways can EPA allocate the permits (total allowable quantity of permits):

(i)
(ii)

▪ Auctioned Permits: Individual firms submit bids to the EPA. When ranked in ____ order of bid price we have a ___ _____ for permits

▪ ____ curve will be identical to the aggregate _ _ _

Answer 31

Initial allocation of permits (auctions)

▪ EPA must allocate the cap (total allowable quantity of permits):

(i) sells the permits by auction;
(ii) allocates permits at no charge

▪ Auctioned Permits: Individual firms submit bids to the EPA. When ranked in descending order of bid price we have a demand schedule for permits

▪ Demand curve will be identical to the aggregate MCA

Question 32

Draw the graph for Initial allocation of permits (auctions)

Answer 32

slide 26

Question 33

Initial allocation of permits (3) (free allocation)

Arbitrary basis: EPA may distribute the permits at no charge e.g. grandfathering. The ___ price in a well-functioning competitive market will be ___ to the corresponding price had the permits been ____ off

▪ EP*

Answer 33

Initial allocation of permits (3) (free allocation)

Arbitrary basis: EPA may distribute the permits at no charge e.g. grandfathering. The equilibrium price in a well-functioning competitive market will be identical to the corresponding price had the permits been auctioned off

▪ EP*

Question 34

Draw the graph of Initial allocation of permits (4) (free allocation)

Answer 34

slide 28

Question 35

Marketable permits and the distribution of income & wealth (1)

How permits are allocated will not affect the level of ___but it will affect the ____ of income and wealth

Draw the graph and show what the:
▪ Authorities gain from an auction
▪ Emissions restrictions impose a real resource
cost. The real resource costs of abatement are ??
- What is the real resource cost to the private sector?
- Does this change if the permits are allocated differently?

If the _ _ _distributes permits at no charge there is no transfer of ____ to the government.

There will be __-___ transfers which will depend on the formula used to make the initial allocation

It is clear that the ___ ____ system is more
attractive to polluting firms than an ____ system
▪ With an auction system in the LR the industry may
___

Answer 35

Marketable permits and the distribution of income & wealth (1)

How permits are allocated will not affect the level of emissions but it will affect the distribution of income and wealth

See graph slide 30

If the EPA distributes permits at no charge there is no transfer of income to the government.

There will be inter-firm transfers which will depend on the formula used to make the initial allocation

It is clear that the free allocation system is more
attractive to polluting firms than an auction
▪ With an auction system in the LR the industry may
contract

Question 36

What does the ERC stand for?

Answer 36

Emissions reduction credit

Question 37

The ERC marketable permit system

▪ The emission reduction credit (ERC) is an alternative system to the previously discussed ___-___-___ permit system

▪ A base (‘business as usual’) level of emissions is estimated. _____ by any particular source above its anticipated baseline ____ are subject to some noncompliance penalty

▪ Above the base, a non-compliance penalty is levied. _____ the base, firm earns emission reduction ____ (ERC). Such credits can be ____ to other sources that
anticipate _____ their baseline emission level

Answer 37

The ERC marketable permit system

▪ The emission reduction credit (ERC) is an alternative system to the previously discussed cap-and-trade permit system

▪ A base (‘business as usual’) level of emissions is estimated. Emissions by any particular source above its anticipated baseline volume are subject to some noncompliance penalty

▪ Above the base, a non-compliance penalty is levied. Below the base, firm earns emission reduction credits (ERC). Such credits can be sold to other sources that
anticipate exceeding their baseline emission level

Question 38

Benchmark cost-minimising solution

We now consider instruments designed to attain pollution stock (rather than ___) targets for non-uniformly-mixing stock pollutants (non-UMP).

▪ We said earlier that the EPA could use ex ante solutions like____ ____ (SR) and ____ (LR). But what then happens when the location of ___ and ____ is already determined so that moving either is not feasible…

▪ In this case, pollution control must work by regulating emissions from ____so as to meet the air quality standards (i.e. assume targets are already set).

▪ These targets may be ‘efficient’ targets or they may not. But let us assume that the EPA seeks ____-____ targets.

▪ Therefore, our next analysis is to obtain the ____ allowable emissions from each source so that the pollution target is reached in every receptor area. Let us consider each of the three main instruments in turn.

Answer 38

Benchmark cost-minimising solution

We now consider instruments designed to attain pollution stock (rather than emission) targets for non-uniformly-mixing stock pollutants (non-UMP).

▪ We said earlier that the EPA could use ex ante solutions like planning control (SR) and zoning
(LR). But what then happens when the location of polluters and people is already determined
so that moving either is not feasible?

▪ In this case, pollution control must work by regulating emissions from sources so as to meet
the air quality standards (i.e. assume targets are already set).

▪ These targets may be ‘efficient’ targets or they may not. But let us assume that the EPA seeks
least-cost targets.

▪ Therefore, our next analysis is to obtain the maximum allowable emissions from each source
so that the pollution target is reached in every receptor area. Let us consider each of the three main instruments in turn.

Question 39

Using non-transferable emissions licences :

Adopts some criterion to apportioning ____ among the individual sources, the EPA distributes licences (permits or quotas) to ____ sources for the total ____ ____

▪ Must solve a ____ ____ problem. Licences should be allocated to each source in _____ that represent the solution to the problem

▪ Consider J spatially distinct receptors: j=1,2,…,J and N distinct pollution sources: i=1,2,…,N. The transfer coefficient dji describes the impact from i in j

Answer 39

Using non-transferable emissions licences

Adopts some criterion to apportioning licences among the individual sources, the EPA distributes licences (permits or quotas) to emissions sources for the total allowable quantity

▪ Must solve a cost minimisation problem. Licences should be allocated to each source in quantities that represent the solution to the problem

▪ Consider J spatially distinct receptors: j=1,2,…,J and N distinct pollution sources: i=1,2,…,N. The transfer coefficient dji describes the impact from i in j

Question 40

Using non-transferable emissions licences :

Pollution at location j is Aj

Previously interested in the choice of efficient emissions ___ for non-uniform mixing pollutants (NUMPs)

▪ But now we are interested in the choice of ___. Assuming that ___ for pollutant stocks have already been set in each receptor ____

▪ To task is to find the level of ___ from each source to minimise the ___ of hitting the target

Answer 40

Using non-transferable emissions licences

Pollution at location j is Aj

Previously interested in the choice of efficient emissions target for non-uniform mixing pollutants (NUMPs)

▪ But now we are interested in the choice of instrument. Assuming that targets for pollutant stocks have already been set in each receptor area

▪ To task is to find the level of emissions from each source to minimise the cost of
hitting the target

Question 41

Using non-transferable emissions licences :

Let Aj* be the target (e.g. ambient air quality) for receptor j, the overall goal is that in no area should pollutant concentration exceed Aj*

Write the expression for this…

What is the solution when solving this…

All that is required of the EPA is to solve the above and then allocate licenses to each source based on the solution. Even if firms have identical MCAs, they wont do equal abatement (transfer coefficient differs). This is the non-uniform mixing case

Answer 41

Slide 35

Question 42

Using non-transferable emissions licences :

Comparing this with the condition for a least cost UMP instrument:
? = ?

Answer 42

MCA = u* (mu*)

Question 43

Using non-transferable emissions licences :

▪ MCAs equal across pollution sources, hence, firms/sources will do identical amounts
of ____efforts.

▪ Sources whose emissions lead to relatively high damage should have relatively low ____(so relatively high ____).

▪ Thus, the ___ ___ ___approach can only be used cost-efficiently, if the EPA knows the full solution.

Answer 43

Using non-transferable emissions licence

▪ MCAs equal across pollution sources, hence, firms/sources will do identical amounts
of abatement efforts.

▪ Sources whose emissions lead to relatively high damage should have relatively low
emissions (so relatively high MCAs).

▪ Thus, the CAC approach can only be used cost-efficiently, if the EPA knows the full
solution.

Question 44

Using emission taxes/subsidies:

What do the Mu(u*) terms represent?

What are the Dji coefficients?

What do we get By summing these values over all source areas? How is this shown in an expression?

What is required for cost efficiency of the tax?

Answer 44

The u* (mu*) terms in the N equations are shadow prices

The dji coefficients tell us by how many units pollution increases by in receptor j if emissions from source i rise by one unit e.g. u2*d2i

▪ By summing these values over all source areas we get the total damage in all receptor areas from a unit of pollution from source i:

▪ Cost efficiency requires that each firm pays a tax equal to the value of the of that damage.

Question 45

Using emission taxes/subsidies EVAL

The ___/___ rate will not be the same for each firm because damage varies according to the ____ of emission source. The attractive feature of these
instruments that a ____ rate can be applied over ___ polluters disappears

▪ If the EPA were determined to use a tax/subsidy and tried to calculate the source specific rates it would need to know the same info as for ___ ___ ___ i.e. the ____ function for each firm

Answer 45

Using emission taxes/subsidies

The tax/subsidy rate will not be the same for each firm because damage varies according to the location of emission source. The attractive feature of these
instruments that a single rate can be applied over all polluters disappears

▪ If the EPA were determined to use a tax/subsidy and tried to calculate the source specific rates it would need to know the same info as for CAC i.e. the MCA function for each firm

Question 46

Using marketable emissions permits:

How would marketable permits work in this case? Each site has a pollution _____ target. Pollution source prohibited from making an emission to receptor ___ quantity of permit for that receptor site.

▪ A ____ for permits emerges for each receptor area. Each polluter will trade in many of these markets _____ so there will be a ___ ____ price in each market

▪ Permits for each receptor area are freely marketable on one-to-one basis but this does not apply to permits for different receptors. Permits are not ____
____ to pollute- they apply to particular places

▪ The J shadow prices, u*j , are the ____ ____ ____ in each market/receptor

Answer 46

Using marketable emissions permits:

How would marketable permits work in this case? Each site has a pollution concentration target. Pollution source prohibited from making an emission to receptor above quantity of permit for that receptor site.

▪ A market for permits emerges for each receptor area. Each polluter will trade in many of these markets simultaneously so there will be a unique equilibrium price in each market

▪ Permits for each receptor area are freely marketable on one-to-one basis but this does not apply to permits for different receptors. Permits are not unrestricted
rights to pollute- they apply to particular places

▪ The J shadow prices, , are the equilibrium permit prices in each market/receptor

Question 47

Using marketable emissions permits:

The least cost solution requires a firm to equate its MCA with ______ (have to pay the permit price). The rhs of MCAi gives the latter cost which is a _____ ____ of the permit prices i.e. the cost to the firm in permit prices paid for one unit of emissions

▪ The administration of such a system is very demanding. However, unlike CAC and tax/subsidy instruments the EPA does not need to know each firm’s ____in order to achieve the target at ___ ___. This is why they are attractive to economists.

Answer 47

Using marketable emissions permits:

The least cost solution requires a firm to equate its MCA with MCNA (have to pay the permit price). The rhs of MCAi gives the latter cost which is a weighted sum of the permit prices i.e. the cost to the firm in permit prices paid for one unit of emissions

▪ The administration of such a system is very demanding. However, unlike CAC and tax/subsidy instruments the EPA does not need to know each firm’s MCA in order to achieve the target at least cost. This is why they are attractive to economists.

Question 48

Relative Merits- Cost Efficiency

Cost Efficiency: All three (taxes, subsidies, permits) can achieve a target at ___ ___

▪ Why will a CAC will not usually be cost efficient ?

▪ Why is CAC inefficient relative to tax/subsidy or marketable permit?

Answer 48

Relative Merits- Cost Efficiency

Cost Efficiency: All three (taxes, subsidies, permits) can achieve a target at least cost.

▪ A CAC will not usually be cost efficient because the EPA will not know eachcpolluter’s MCA so emissions control could be calculated for each firms to equalise
the MCAs across firms

▪ CAC is inefficient relative to tax/subsidy or marketable permits. In the case of NUMP CAC and tax/subsidy instruments require knowledge of each firm’s MCA. Only marketable permits do not require this info

Question 49

Relative merits- monitoring, administering and enforcing compliance costs (2)

Answer 49

Could be large and differ

▪ Makes minimum technology standards popular due to relatively low monitoring cost

Question 50

Long-run effects- net income effects

Instrument selection will depend on ?

▪ Whether LR effect is different from the __ __

▪ (i)__ ___ ___
(ii) ___ ___

▪ Changes in net income can affect __ ___

▪ Could design regimes that are revenue ___ e.g. firms in a subsidised industry may be required to make lump-sum payments equal to the total value of the ____

Answer 50

Long-run effects- net income effects

Instrument selection will depend on how the amount of pollution control varies

▪ Whether LR effect is different from the SR

▪ (i) net income effects and (ii) technological innovations

▪ Changes in net income can affect industry size

▪ Could design regimes that are revenue neutral e.g. firms in a subsidised industry may be required to make lump-sum payments equal to the total value of the subsidies

Question 51

Long-run effects- technology effects

In the LR the instrument may affect the rate of
___. Assuming MC fell, holding ____ constant.

▪ Dynamic efficiency effects: CAC instruments
lead to _____ incentives to innovate. Emissions
tax/subsidy will promote innovation

___ incentive to innovate with an emissions
tax.

Answer 51

Long-run effects- technology effects

In the LR the instrument may affect the rate of
innovation. Assuming MC fell, holding emissions
constant.

▪ Dynamic efficiency effects: CAC instruments
lead to weak incentives to innovate. Emissions
tax/subsidy will promote innovation

▪ Strong incentive to innovate with an emissions
tax.

Question 52

Draw the graph for the long-run technology effects?

Answer 52

Slide 44

Question 53

the graph for the long-run technology effects:

▪ What Area is the saving if MC fell and emissions remained unchanged. What is the Additional saving?

▪ Incentive to innovate if TC < PV of +  that
accumulate over the life of the firm

Answer 53

▪ Area  is the saving if MC fell and emissions remained unchanged. Additional saving of 

▪ Incentive to innovate if TC < PV of +  that
accumulate over the life of the firm

Question 54

Double dividend (DD) and equity

Will DD vary?

▪ Do different instruments have different distributional effects?

▪ E.g. emissions tax on a fossil fuel burning electricity plant will affect consumers of goods where there is a ____ energy input

▪ Government can use _____ fiscal changes e.g. income transfers from poorer groups facing high energy bills.

Difficult to design ___ ___ policy. ___ ___ payment to ensure that where the tax incidence is ____ behaviour does not change

Answer 54

Double dividend (DD) and equity

DD will vary

▪ Yes, Different instruments have different distributional effects

▪ E.g. emissions tax on a fossil fuel burning electricity plant will affect consumers of goods where there is a large energy input

▪ Government can use compensating fiscal changes e.g. income transfers from poorer groups facing high energy bills. Difficult to design neutral distribution policy. Lump sum payment to ensure that where the tax incidence is excessive behaviour does not change