Session 4 Flashcards

1
Q

What problems do regulators have in regard to climate policies in practice?

A

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
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2
Q

What is Climate Sensitivity?

A

Change in average surface temperature, if amount of CO2 in the atmosphere is doubled (relative to pre-industrial levels)

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3
Q

Why is the economic growth rate important for climate change questions?

A
  • economic output and its development is a driving factor for emissions
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4
Q

What are ex-ante & ex-post decisions?

A

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

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5
Q

What are important criteria for pollution control instruments under uncertainty?

A
  • 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?
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6
Q

How do price & quantity instruments perform under under uncertainty in regards to dependability (= with what probability does the instrument achieve the target)?

A
  • price: fix price & result in uncertain quantities
  • quantity: fix quantity & result in uncertain price
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7
Q

How do price & quantity instruments perform under under uncertainty in regards to dependability?

A
  • 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
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8
Q

How do price instruments behave in regards to price & quantities?

A

result in fixed price and uncertain quantities (depend on marginal cost of abatement)

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9
Q

How do quantity instruments behave in regard to emission price and quantitiy?

A

result in uncertain price and fixed quantitiy

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10
Q

Comparing the slopes of marginal emission damage & cost curves, which instrument (taxes vs licenses) is preferred?

A
  • MC slope < MD slope -> licenses
  • MC slope > MD slope -> taxes preferred
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11
Q

What hapens when firms expect a permit system in regards to reporting costs?

A
  • firms have incentive to over-report as price would be lower
  • information about true costs lie in permit price
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12
Q

What happens if firms expect an emission tax in regard to reporting costs?

A
  • firms have incentive to under-report as tax would be smaller
  • information lies in true emission quantity
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13
Q

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?

A
  • 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)
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14
Q

How do transaction costs influence policy making and where do they come from?

A
  • 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
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15
Q

What is regulatory failure?

A
  • when regulatory costs exceed benefits
  • another form is regulatory capture: firms influencing politics through lobbying etc.
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16
Q

What is the UNFCCC

A
  • 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
17
Q

What is the Kyoto Protocol?

A
  • signed 1997 by 192 nations
  • ratified by 82 countries
  • international law -> binding
  • industrialized nations should take lead in reductions
  • penalties for non-compliance
18
Q

What are flexibility mechanisms in the Kyoto Protocol?

A
  • 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
19
Q

What are the Copenhagen accord & the Doha ammendment?

A
  • 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
20
Q

What is the Paris agreement?

A
  • 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
21
Q

What is the European Emission Trading Scheme & its goals?

Why a trading scheme?

A
  • 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
22
Q

What was ETS phase 1 & its results?

A
  • 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
23
Q

What was ETS phase 2 & its results?

A
  • 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
24
Q

What is ETS phase 3?

A
  • 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
25
Q

How do auctions in ETS phase 3 work?

A
  • 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%)
26
Q

What were results of ETS phase 3?

A
  • 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
27
Q

How do Hold-back and Stability Reserve cope with the surplus of permits (2.1 billion in 2013) in ETS phase 3?

A
  • 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
28
Q

What are plans for ETS phase 4?

A
  • 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