Session 4 Flashcards
What problems do regulators have in regard to climate policies in practice?
The fundamental inputs for determining efficient level of pollution and/or optimal tax rates are uncertain. This puts the regulator at risk of making wrong decisions and regulatory failure.
Reasons:
- Abatement costs are private information of firms
- physical damages have to be estimated with scientific models
- monetary damages from physical damages add extra layer
- future of technology & prices not known
What is Climate Sensitivity?
Change in average surface temperature, if amount of CO2 in the atmosphere is doubled (relative to pre-industrial levels)
Why is the economic growth rate important for climate change questions?
- economic output and its development is a driving factor for emissions
What are ex-ante & ex-post decisions?
ex-ante: a decision that is optimal relative to information at time t
ex-post: a decision that is best decision, given the realization of the uncertainty
What are important criteria for pollution control instruments under uncertainty?
- dependability: with what probability does the instrument achieve the target?
- flexibility: how easy is it to adopt the system to changing circumstances?
- cost of uncertainty: how large are efficiency losses, if assumptions are violated?
- information requirements: how costly is it to obtain the required information to implement the instrument?
How do price & quantity instruments perform under under uncertainty in regards to dependability (= with what probability does the instrument achieve the target)?
- price: fix price & result in uncertain quantities
- quantity: fix quantity & result in uncertain price
How do price & quantity instruments perform under under uncertainty in regards to dependability?
- hard to make general statement
- price based are thought to be less flexible than quantity instruments
- command and control instruments might often be more flexible
How do price instruments behave in regards to price & quantities?
result in fixed price and uncertain quantities (depend on marginal cost of abatement)
How do quantity instruments behave in regard to emission price and quantitiy?
result in uncertain price and fixed quantitiy
Comparing the slopes of marginal emission damage & cost curves, which instrument (taxes vs licenses) is preferred?
- MC slope < MD slope -> licenses
- MC slope > MD slope -> taxes preferred
What hapens when firms expect a permit system in regards to reporting costs?
- firms have incentive to over-report as price would be lower
- information about true costs lie in permit price
What happens if firms expect an emission tax in regard to reporting costs?
- firms have incentive to under-report as tax would be smaller
- information lies in true emission quantity
Both permits and taxes are vulnerable to misstating costs.
How can a scheme look which is economically efficient and incentivizes to be thruthful?
What happens if firms understate/overstate abatement costs?
What is the pollution abatement cost function in this case?
- assume MD is known
- scheme is mix of marketable permits and subsidies for excess emissions reduction
- L permits are allocated through auction
- Firms receive subsidy payment for emitting less than their permits
- Subsidy rate s is set at the prcie defined as the intersection of reported MC and MD
- Pollution abatement cost function PCC(M) = A(M) + P*L- s(L - M)
- P = price of permits
- understating: firms loose because they emit less & pay higher price for permits & not subsidies are payed out
- overstating: firms loose because high subsidy payment drives up emission certificate price, loss due less emissions, pay higher price for permits & no subsidies payed (costs exactly balance out gain from overstating)
How do transaction costs influence policy making and where do they come from?
- creating regulations creates transaction costs mainly due to uncertainty
- include: acquiring information, monitoring and enforcing, establishing and implementing instruments, monitoring performance
- not real resource costs & indirect costs like loss of competitiveness of an economy
- decision on regulation always has to consider total cost
- transaction costs significant -> simple command & control instruments are attractive
What is regulatory failure?
- when regulatory costs exceed benefits
- another form is regulatory capture: firms influencing politics through lobbying etc.
What is the UNFCCC
- UN Framework Convention on Climate Change
- framework for concrete international treaties
- aim: stabilizy greenhouse gas concentrations so they won’t intervere with the climate system
- annual conferences
What is the Kyoto Protocol?
- signed 1997 by 192 nations
- ratified by 82 countries
- international law -> binding
- industrialized nations should take lead in reductions
- penalties for non-compliance
What are flexibility mechanisms in the Kyoto Protocol?
- emission trading in one zone/country
- clean development mechanisms
- Annex 1 countries can start projects to reduce emisions in lower countries to increase own allowed emissions
- joint implementation
- Annex 1 countries can finance projects in another Annex 1 country to increase own emission budget
- decreases budget for respective other country
- creating CO2 sinks creates removal units that increase emissions budget
What are the Copenhagen accord & the Doha ammendment?
- Copenhagen: set goal of max global warming of 2 °C
- Doha
- amendment to Kyoto
- extend commitment period to 2013 -2020
- signed only by 75 states -> not yet binding
What is the Paris agreement?
- Airm: limit global warming to 2° and increase resilience against climate change
- all nations responsible
- 195 signed, 148 ratified
- first truly global climate change agreement
- based on voluntary reductions -> not enforcable
- mechanism:
- every nation proposes national determined contribution NDC 2018
- effects from combined NDCs are assessed
- countries come up with new NDCs & plan until 2023
- joint revision
- NDCs should be ambitious & stricter than previous ones
- emission trading between countries allowed
What is the European Emission Trading Scheme & its goals?
Why a trading scheme?
- part of EUs Kyoto commitment
- firms of covered industries have to surrender one permit per 1 ton of CO2 equivalent in any year until 30.4. of the following year
- goals:
- incentive to adopt existing clean technologies & development of new ones
- cost efficient emission reduction for EU
- why trading:
- political infeasibly to set up harmonized CO2 tax in whole EU
- avoid tax competition in harmonized EU market
- downstream system
- certificates have to surrendered by emitters not producers of fossil fuels
What was ETS phase 1 & its results?
- Trial phase 2005 - 2007
- getting all parties used to emission trading
- one fixed cap for whole trading period
- coverage:
- power sector
- some energy intensive industries
- around half of all CO2 & GHG emitters
- penalty 40 € & emissions added to next year
- certificates allocated via national allocation plans
- cap decided by countries
- largely handed out for free
- free allocations based on past emissions
- had to be approved by EU
- result:
- prices highly volatile
- no banking of permits for later phases allowed
- overallocation of permits
- at end, permits had no value
What was ETS phase 2 & its results?
- 2008 - 2012 first KP comittment period
- cap still set by national allocation planse
- stricter review by EU
- free allocation based on past emissions
- penalty increased to 100€
- banking of certificates allowed (happened to 17% of certificates)
- aviation industry added with own trading scheme
- result:
- prices dramatically fell during trading phase
- economic crisis -> less emissions than expected
- more power production from renewables than expected
- many credits from flexibilty options
What is ETS phase 3?
- 2013 - 2020
- central setting of cap by EU
- decreases annually based of average emissions in 2008 - 2012
- replaces national allocation
- more industries covered
- allocation of credits
- 57% centralized auction
- free allocation based on benchmarking
- power sector 100% auctioning
- benchmarking based on 10% most efficient installations in 2008 & allocate 80% of these amounts for free
- free allocation will drop
How do auctions in ETS phase 3 work?
- yearly cap is auctioned in multiple auctions (3 per week)
- single price auction
- bid sorted by price
- price is set to highest price such that volume of accepted bids exceeds cap
- all successful bidders pay price of lowest accepted bid
- revenues used for climate and energy purposes (80%)
What were results of ETS phase 3?
- low prices source of concern
- widely believed that prices do not reflect expected abatement costs
- for low prices, no incentives to invest in new tech
How do Hold-back and Stability Reserve cope with the surplus of permits (2.1 billion in 2013) in ETS phase 3?
- Hold Back
- to reduce surplus 900 million permits were held back from 2014 - 2016
- these were planned to be auctioned in 2019
- market stability reserve
- permanent reserve that is used to stabilize price
- if too many are in circulation -> transfer to reserve
- shortage -> permits taken out of reserve
- hold back 2014 - 2016 transferred to reserve
- pre defined rules
What are plans for ETS phase 4?
- yearly linear decrease increases to 2.2% of 2005 emissions in line with EU 2030 target (43% reduction relative to 2005)
- revised list of sectors at relocating that will get certificates for free
- updated benchmark for free allocation
- reserve fixed part of emissions trading
- connections with other emission trading systems world wide
