Command & Control and Emission Trading

Transcription

1 Command & Control and Emission Trading Jan Abrell Centre for Energy Policy and Economics (CEPE) D-MTEC, ETH Zurich Command and Control and Emission Trading

2 Outline So far Command and Control Instruments Emission Trading European Emission Trading System Summary Command and Control and Emission Trading

3 So far Natural environment provides four basic services (basic life-support, amenity, waste sink, nat. resources) IPAT, Kaya s identity, EKC hypothesis Efficiency and optimality First and second welfare theorem Public goods: Non-rivalrous in consumption + non-excludability Externalities: Direct effects caused by consumption of one agent on utility/cost of another agent Command and Control and Emission Trading

4 The Two Rules of Environmental Regulation Target choice Instrument Choice Command and Control and Emission Trading

5 Pigouvian Tax: Pareto and Cost Efficiency Impose tax equal to marginal damage on emissions Tax is complete All individuals have to pay the same tax Generate income Double dividend and green tax reforms Command and Control and Emission Trading

6 Environmental taxes Pigou tax Tax on emissions equal to marginal damage Cost-efficient and Pareto-efficient Marginal damage often not known Difficult to implement However Emission taxes are generally cost-efficient Often input or output taxes (instead of direct emission taxes) Save monitoring/implementation cost Command and Control and Emission Trading

7 Pigouvian Subsidies Pigouvian subsidy Subsidy on abatement equal to marginal damage Subsidy is complete All polluters receive the same subsidy Create expenses that have to be refinanced Negative double dividend Command and Control and Emission Trading

8 Today Three broad classes of regulatory instruments Environmental tax (last time) Command and control Emission trading Today: How do command and control and emission trading instruments perform in terms of cost-efficiency? How do these instruments compare to taxes? Command and Control and Emission Trading

9 Outline So far Command and Control Instruments Emission Trading European Emission Trading System Summary Command and Control and Emission Trading

10 Command and Control Instruments (C&C) Direct control of emissions Most common form of environmental regulation Can be imposed at various stages of production process Command and Control and Emission Trading

11 Model Setup (again) Emission target I polluters characterized by Unregulated (business-as-usual, laissez-faire) emissions: Abatement of polluter i: Emissions of polluter i: Abatement cost function Command and Control and Emission Trading

12 C&C: Set Abatement of Each Polluter Regulator minimizes abatement cost choosing abatement of each polluter given the emission target Lagrangian First-order conditions (interior solution) Command and Control and Emission Trading

13 C&C: Abatement such that Marginal Abatement Cost Equalize Impose emission limit for each polluter Cost efficiency requires knowledge of individual abatement cost function Uniform standards are cost-inefficient Create no income (except fines but then ecologically inefficient) Command and Control and Emission Trading

14 Example: Swiss Regulation of CO 2 Emissions of Cars Standard for new cars 2015: 130 gco 2 /km (on average) 2020: 95 gco 2 /km (on average) Weight based standard Each car has individual target Upstream system: Importers (manufactures) pay fine for excess emissions: 2018: CHF/tCO 2 Explicitly designed to be in line with EU regulation Source: BFE (2016) Command and Control and Emission Trading

15 Outline So far Command and Control Instruments Emission Trading European Emission Trading System Summary Command and Control and Emission Trading

16 Pollution Permits: General Idea Regulator divides emission budget ( ) into emission allowances/permits (z) Each firm receives an initial amount of permits ( ) Total number of initially allocated permits equals target For each unit of emissions hold a permit: Firms are allowed to trade permits Price of emissions Command and Control and Emission Trading

17 Emission Trading: Firms Behavior (cont.) Firms minimize abatement cost given permit price (perfect competition) choosing permit holding and abatement Permit trade Initial allocation net of permit holding : Sell permit on the market income/less cost : Buy permit on the market higher cost Use constraint to simplify to minimization with only one choice variable (abatement) Command and Control and Emission Trading

18 Emission Trading: Firms Behavior Firms minimize abatement cost given emission price First order condition Each firm equates marginal abatement cost to emission price Cost efficiency Emission trading equates marginal abatement cost Command and Control and Emission Trading

19 Cost Efficiency of Emission Trading Permit Trade Command and Control and Emission Trading

20 Initial Allocation Emission trading requires initially allocating permits to firms Grandfathering: Firms receive initial permits for free (benchmarking) Permit price increases final consumer price Windfall Profits for firms Auctioning of permits Creates income for government Double dividend Grandfathering often has higher political acceptability Command and Control and Emission Trading

21 Outline So far Command and Control Instruments Emission Trading European Emission Trading System Summary Command and Control and Emission Trading

22 European Climate Policy European greenhouse gas (GHG) mitigation policy is based on three main targets until 2020 (2030) (1) Energy efficiency target 20% (27%) improvement (2) Renewable energy target 20% (27%) of energy consumption (3) Greenhouse gas reduction target 20% (40%) compared to 1990 level Command and Control and Emission Trading

23 EU Greenhouse Gas Target for % (-14%) compared to 1990 (2005) European Emission Trading System 21% reduction (to 2005) Covers ~45% of EU emissions Classical cap and trade system Effort Sharing Decision 10% reduction (to 2005) Abatement allocated to member states National policies

24 Scope of the EUETS Mainly CO 2 (also N 2 O, PFCs) Regulated activities Power plants (> 20 MW) Energy intensive industries Refineries Metal production Cement, lime, glass, ceramics, pulp and paper Chemical Industries Civil aviation (intra-european) Command and Control and Emission Trading

25 EUETS Periods Trial Phase with full grandfathering Nearly no reduction target Nearly full grandfathering Higher reduction requirement % auctioning (mainly in electricity sector) Grandfathering for sectors with carbon leakage risk Cap annually decreases by 1.74% Source: EEA, 2017 Command and Control and Emission Trading

26 Verified Emissions by Activity Source: EEA, 2017 Command and Control and Emission Trading

27 Banking and Borrowing Banking Non-used permits can be used in the next period Borrowing Future permits can be used in the current period Full banking and borrowing across years within a period Only banking across periods : No banking to period 2 Source: EEA, 2017 Command and Control and Emission Trading

28 International Credits EUETS allows use of international credits Usage is limited to 50% of total reduction International credits (baseline and credit) Joint Implementation (JI) projects in in industrialized countries create ERU credit (emission reduction units) Clean development mechanism (CDM) projects in developing countries create CER credit (certified emission reduction) Likely use of international credits not allowed from 2021 onwards Command and Control and Emission Trading

29 Market Stability Reserve (MSR) Big surplus of un-used allowances in the EUETS (~ 1.7 billion in 2017) If surplus in the market too high (low) withdraw (release) permits from the market by auctioning less Surplus > 833 Mio. permits Build-up MSR Surplus < 400 Mio. permits Release 100 Mio. out of MSR System starts from 2019 onwards If MSR becomes too large, cancelation of permits Source: EEA, 2017 Command and Control and Emission Trading

30 Swiss Emission Trading System Same scope as EUETS (but currently no aviation) ~50 Firms under CHETS do not have to pay CO 2 levy Middle sized firms can opt-in to save CO 2 levy Cap decreases by 1.74 % per year Agreement to merge CHETS and EUETS in 2020 (CH needs to include aviation) Command and Control and Emission Trading

31 Outline So far Command and Control Instruments Emission Trading European Emission Trading System Summary Command and Control and Emission Trading

32 C&C: Abatement such that Marginal Abatement Cost Equalize Impose emission limit for each polluter Cost efficiency requires knowledge of individual abatement cost function Uniform standards are cost-inefficient Create no income (except fines but then ecologically inefficient) Command and Control and Emission Trading

33 Emission Trading Regulator allocates permits to firms which are allowed to trade permits Initial allocation Grandfathering or auctioning Cost-efficiency as all firms see the same emission price Difference to emission tax Tax sets the price, permit trade sets the emission quantity Command and Control and Emission Trading

34 Literature Perman R., Y. Ma, J. McGilvray, and M. Common (2003): Natural Resource and Environmental Economics. Chapter 6 (Ch. 7 in 3rd edition). European Environmental Agency (EEA) (2017): Trends and projections in the EU ETS The EU Emission Tradings System in numbers. Supplementary: Tietenberg, T. (2006): Emission trading: principles and practice. 2nd edition. RFF Press. (TT, on emission trading) Command and Control and Emission Trading

35 Questions? Command and Control and Emission Trading