Lecture 8: Transnational Policies Flashcards
two ways to deal with externalities
- carbon tax
- cap-and-trade
Pigou’s solution
carbon tax
Coase’s solution
pollution permits
Pigou’s solution: explanation
The government (the central planner) should intervene directly through centralized instruments:
- quantity regulation (bans)
- monetary tools (taxes / subsidies)
= carbon tax
Coase’s solution: explanation
The government (the central planner) should define and allocate entitlements and then, if reallocation is beneficial,
- either the market will operate through Coasean bargains
- or a firm will internalize the externality
= pollution permits
carbon tax
Tax on each unit of greenhouse gas emissions –> incentive to reduce pollution whenever doing so would cost less than paying the tax
what is the key with carbon tax
getting the tax level right
cap and trade
Designation of a maximum allowance of aggregate emissions –> if an installation exceeds its maximum allowance from other installations
cap-and-trade: industry
Cheaper compliance for industry in the early stages of the scheme
carbon tax: industry
Bigger initial hit to the balance sheet
carbon tax: price
Price of emitting a unit of pollution is set, but the total quantity of emission not
cap and trade: price
Certainty about the quantity of emissions but uncertainty about the cost of achieving these reductions
how much trading periods are there
3
first trading period (2005-2007)
The number of allowances, based on estimated needs, turns out to be excessive; consequently the price of first-period allowances falls to zero in 2007
second trading period (2008-2012)
The number of allowances is reduced by 6.5% for the period, but the economic downturn cuts emissions, and thus demand, by even more. This leads to a surplus of unused allowances and credits which weighs on carbon price
third trading period (2013-2020)
Biggest changes are the introduction of an EU-wide cap on emissions (reduced by 1.74% each year => reduction of 21% by 2020 compared to 2005
trading period from 2021
New phase, linear reduction of 2,2% each year in the cap + green deal + push for it to become a global climate regime
important to consider for carbon tax
- scope
- point of taxation
- tax and escalation rates
- distributional impacts
- revenues
scope
- What are you going to target
- Substances covered
point of taxation
upstream/downstream on the supply chain. firms or individuals
tax and escalation rates
social costs and then increase
distributional impacts
Direct/indirect impacts on consumers, some of them being more vulnerable than others already, transition can make it even worse for them.
revenues
Redistribution, investments in infrastructures, in innovation, etc.
important issue with cap and trade / carbon tax
carbon leakage
three important channels for carbon leakage
- energy markets
- competition
- free riding
carbon leakage: energy markets
loss of EU demand for this, makes oil, coal and gas cheaper and more attractive to the rest of the world to buy
carbon leakage: competition
due to the costs of EU climate policy, industry relocates their production, including corresponding carbon emissions
carbon leakage: free-riding
because of EU climate policy, others see les pressure to act and hence increase their own emissions, because EU is doing it already
including the green deal in international trade
EU green deal => global green deal. But there are many different views and constraints in different countries around the world, even also within the EU.
All EU leaders signed it in 2019, but Poland state they won’t be able to become climate neutral by 2050 because they need money for this that they don’t have.
how to make international agreements work?
- clear mandate
- clear decision-making structure
- strong leadership
- binding rules
- conditionalities
- clear strategic plans
- monitoring and evaluation mechanisms
- understand the role of the context
- networked governance –> complementary and cooperation
- think about changing private sector and long-term goals
