Lecture 8: Transnational Policies

Question 1

two ways to deal with externalities

Answer 1

1. carbon tax
2. cap-and-trade

Question 2

Pigou’s solution

Answer 2

carbon tax

Question 3

Coase’s solution

Answer 3

pollution permits

Question 4

Pigou’s solution: explanation

Answer 4

The government (the central planner) should intervene directly through centralized instruments:

• quantity regulation (bans)
• monetary tools (taxes / subsidies)

= carbon tax

Question 5

Coase’s solution: explanation

Answer 5

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

Question 6

carbon tax

Answer 6

Tax on each unit of greenhouse gas emissions –> incentive to reduce pollution whenever doing so would cost less than paying the tax

Question 7

what is the key with carbon tax

Answer 7

getting the tax level right

Question 8

cap and trade

Answer 8

Designation of a maximum allowance of aggregate emissions –> if an installation exceeds its maximum allowance from other installations

Question 9

cap-and-trade: industry

Answer 9

Cheaper compliance for industry in the early stages of the scheme

Question 10

carbon tax: industry

Answer 10

Bigger initial hit to the balance sheet

Question 11

carbon tax: price

Answer 11

Price of emitting a unit of pollution is set, but the total quantity of emission not

Question 12

cap and trade: price

Answer 12

Certainty about the quantity of emissions but uncertainty about the cost of achieving these reductions

Question 13

how much trading periods are there

Answer 13

3

Question 14

first trading period (2005-2007)

Answer 14

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

Question 15

second trading period (2008-2012)

Answer 15

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

Question 16

third trading period (2013-2020)

Answer 16

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

Question 17

trading period from 2021

Answer 17

New phase, linear reduction of 2,2% each year in the cap + green deal + push for it to become a global climate regime

Question 18

important to consider for carbon tax

Answer 18

1. scope
2. point of taxation
3. tax and escalation rates
4. distributional impacts
5. revenues

Question 19

scope

Answer 19

• What are you going to target
• Substances covered

Question 20

point of taxation

Answer 20

upstream/downstream on the supply chain. firms or individuals

Question 21

tax and escalation rates

Answer 21

social costs and then increase

Question 22

distributional impacts

Answer 22

Direct/indirect impacts on consumers, some of them being more vulnerable than others already, transition can make it even worse for them.

Question 23

revenues

Answer 23

Redistribution, investments in infrastructures, in innovation, etc.

Question 24

important issue with cap and trade / carbon tax

Answer 24

carbon leakage

Question 25

three important channels for carbon leakage

Answer 25

1. energy markets
2. competition
3. free riding

Question 26

carbon leakage: energy markets

Answer 26

loss of EU demand for this, makes oil, coal and gas cheaper and more attractive to the rest of the world to buy

Question 27

carbon leakage: competition

Answer 27

due to the costs of EU climate policy, industry relocates their production, including corresponding carbon emissions

Question 28

carbon leakage: free-riding

Answer 28

because of EU climate policy, others see les pressure to act and hence increase their own emissions, because EU is doing it already

Question 29

including the green deal in international trade

Answer 29

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.

Question 30

how to make international agreements work?

Answer 30

• 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