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Energy & Climate Policy > Session 2 > Flashcards

Session 2 Flashcards

1
Q

Why is it hard to determine the optimal level of pollution and find ways to achieve it?

A

Because pollution is an externality, if it weren’t, these questions would automatically be taken care of by the market.

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2
Q

What is economic efficiency?

A

An allocation of goods is economically efficient if any change that would benefit somebody would harm somebody else.

-> social welfare cannot be increased by a voluntary trade between agents

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3
Q

What is economic optimality and how does it compare to economic efficiency?

A

An allocation is economically optimal, if it maximizes social welfare.

Is a stronger criteria than economic efficiency, therefore harder to implement since more information is required & redistribution of wealth requires idealogical standpoint.

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4
Q

What criteria do real world policy instruments use?

A

Mix of criteria:

  • economic efficiency (hard to formulate because lack of information)
  • sustainability
  • health or safety considerations
  • equity
  • political feasibility
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5
Q

What are flow pollutants?

Name examples

A
  • cause damage by flow of pollution
  • if source of pollution is removed, damage stops
  • examples: noise, light
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6
Q

What are stock pollutants?

What challenges do they pose?

Name examples

A
  • cause damage by cumulative stock of pollutant
  • cause of most pollution problems
  • stock degrades with time
  • challenge: modelling stocks and flows
  • examples: climate active gases, heavy metals
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7
Q

What characterizes uniformly mixing pollutants?

Name examples

A
  • quick despersion to uniform spatial distribution
  • location does not matter for damage assesment
  • examples: CO² emissions, chloroflourocarbon emissions (FCKW)
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8
Q

What characterizes non-uniformly mixing pollutants?

What challenges do they pose?

Name examples

A
  • do not spread out uniformly
  • pollution concentrations and damages vary from place to place
  • challenges: areal differences
  • examples: ozone accumulation in lower atmosphere, pollutants from diesel emissions (NOx), pollution of local water bodies
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9
Q

What is CO²?

flow pollutant, stock pollutant

uniformly mixing pollutant, non-uniformly mixing pollutant

A

uniformly mixing

stock (if emissions exceeds absorbtion of plants and oceans, stock builds up)

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10
Q

What is the optimal level of pollution?

Why pollute at all?

A
  • producing certain goods may require some pollution
  • completely pollution free production might be very expensive
  • zero pollution is usually neither economically optimal, nor efficient
  • trade-off between benefits and costs of pollution has to be made
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11
Q

Uniformly mixing flow pollutants: How do we find the optimal level of pollution?

A
  1. setting up the benefit curves of pollution
  2. see benefits of pollution as avoiding abatement costs if pollution limit is imposed on company
  3. setting up damage curves of pollution
  4. determining the optimal level of pollution by maximizing net benefits (equal to equalizing marginal benefits and damages)
  5. calculate cost, benefit and welfare of optimal pollution level
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12
Q

How can it be argued that emissions abatement cause side (double) benefits?

A

weak double benefit hypothesis: proceeds of policy instruments for emission reductions are used to reduce distorionary taxes -> economy as a whole profits

strong double benefit hypothesis: regulatory interventions nudges firms to implrove their operations (new technologies)

-> more nuanced view of abatement function necessary

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13
Q

What happens when trade-off between damages and costs seems inappropriate?

A
  • happens often when human health is at stake
  • marginal damage can be modelled as kink function (umgedrehtes L)
  • in practice, trade-offs are always considered (implicitly putting a value on a human life)
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14
Q

How do uniformly mixing stock pollutants differ from uniformly mixing flow pollutants in regards to the calculation of optimal amount of pollution?

A
  • benefit depends on flow while damage depends on stock -> need to model relationship between the two over time
  • policy makers can only control the flow of pollutants
  • stock accumulates over time -> time needs to be modelled
  • > larger decay rate & discount rates imply larger pollution
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15
Q

What are problems in reality with modelling benefit & damage functions as convex/concave functions?

A
  • convex optimization problems have unique solution, but reality more complex
  • e.g. threshold from certain value onwards, combination of multiple curves
  • if functions not convex, information requirements are much higher. this information is hard to get in environmental regulation
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16
Q

With what models can abatement costs be estimated?

A
  • engineering models
    • bottom up with many technical details
    • accurate cost predictions given a set of exogenous prices
    • no changes in relative prices and substitution effects modelled
    • economic changes are not modelled
  • economic models
    • top down aggregated
    • less accurate technical modelling
    • capable of modelling changing relative prices and substitution effects

-> in reality often mixed models

17
Q

What defines abatement costs?

How are they modelled?

A

optimal profit of firm without any abatement - optimal profit with emissions limit

modelled as quadratic functions which is defined from 0 to max. emission limit

18
Q

How are abatement & its costs distributed among different companies at optimum?

A

at optimum:

  • optimal level of abatement different for different firms
  • abatement cost are different for different firms
  • marginal abatement costs are the same for different firms
19
Q

Can private bargaining solve environmental problems?

A
  • according to Coase theroem yes, but:
  • in practice, satisfactory bargaining solutions are unlikely
  • reasons: many parties involved, no property rights for environment enforcable, involvement of several generations, environment is public good
20
Q

How do institutional instruments influence private bargaining about environment?

A

Liability: make polluters liable for damages by externality

Encouragement of social responsibility

21
Q

What characterizes Command and Control Instruments for pollution control?

A
  • direct control over inputs, production or consumption
  • most used form of pollution control
  • optimally less specific and regulation close to ambient pollution levels to allow polluters flexibility in how to comply
22
Q

What characterizes technology requirements as a command & control instrument?

A
  • best practice, best available technology as goal
  • easy to administer
  • likely to be economically inefficient
23
Q

How are costs handeled by politics in regards to environmental policies?

A
  • mandates & bans should not entail excessive costs (practicable)
  • politics have to implicitly make trade off between cost and benefit of emissions (eg put price on human life)
24
Q

What is the problem of command and control measures?

A

often inefficient, since they leave no flexibility to producers and consumers to find least cost options themselves

25
Q

How do emission taxes work?

A

see picture

26
Q

What are advantages & disadvantages of emission taxes as a policy instrument?

A
  • advantages
    • tax is cost efficient & economically efficient
    • individual cost functions of firms do not have to be known
    • tax puts correct price on externality -> produces optimal outcomes
  • disadvantages
    • if non optimal target is set (cannot be computed or non-economic consideration), it can be achieved at least cost but result is not necessarily economically efficient
27
Q

What characterizes abatement subsidies and how do they compare to emission taxes?

A
  • based on business as usual benchmark
  • yields the same economically efficient outcome as tax of same amount
  • resulting wealth distribution is different
  • while tax reduces profits in an industry, subsidy increases profits
28
Q

What characterizes emission permits?

A
  • cap is set and permits are given out accordingly
  • companies will trade permits such that resulting market price equals marginal abatement costs
  • companies will buy as long as abatement costs exceed market price
  • in equilibrium marginal abatement costs for all firms are the same and equal to price of permits
  • emission permits are a cost efficient instrument
29
Q

How do the results of emission trading, emission taxes and abatement subsidies differ?

A

Are the same if price/quantities are correctly chosen.

30
Q

How do the results of auctioning and freely distribute permits differ?

A
  • lead to same abatement decisions
  • in both systems, costs of abatement equal dark gray are in image -> actual resource cost
  • if permits are auctioned, firms additionally have to pay amout equal to light grey area -> transfer of wealth
  • choice alters cost structure of industry and has long-term effects of industry size
  • summing up
    • auctioning redistributes wealth from firms to government
    • free allocation transfers wealth between comanies
    • options are the same in regard to economic efficiency but not economic optimality
31
Q

What are emission reduction credits?

A
  • also marketable
  • business as usual scenario fixes level of emission for specific firm
  • system of credits that are created by firms emitting less than their bau quantities
  • credits are tradeable between firms and enable those who emit more than bau quantities to do so legally
32
Q

What is better and why, market instruments or command and control?

A
  • in general market instruments
    • no knowledge of cost structures needed to reach emission target and cost efficiency
    • command and control needs detailed information on costs
    • markets effectively process information
    • market result in abatement where it is least costly
    • markets create right incentives to change in dynamic setting
  • in reality markets often fail due to imperfect competition, moral hazard, asymmetric information, public goods which could change result
33
Q

What are the distributional aspects of environmental policy?

A
  • Not only between the government and the firms.
  • Goods whose production has a high environmental impact typically get more expensive.
  • Impact on wealth consumers that consume these goods.
  • Generally, economic beneficiaries and losers will be different. Measures to offset the negative impacts might be necessary.
  • Examples of actors that are adversly effected by measures making CO2 emissions more costly.
    • Individuals whose energy bill uses up a considerable amount of their income.
    • Commuters.
    • Energy intensive industries that face competition from abroad.
    • Companies and individuals working in the coal industry.

Energy & Climate Policy (8 decks)

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