Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain

Two important decisions in designing markets for tradable emissions permits are whether to allow banking of permits (coupons) and whether to allow trading in entitlements to future permits (shares). Banking is predicted to reduce price instability when firms trade in a reconciliation market after the quantity of emissions has been determined. Tradable shares are a common feature in proposals for emissions trading in Canada. We conduct a laboratory experiment to investigate how bankable coupons and tradable shares affect efficiency and prices under uncertainty. Cognitive demands on the subjects are reduced by computerized advice on the optimal allocation of coupons across periods and the implied marginal values of coupons and shares. Banking, share trading, and uncertainty conditions are introduced in a complete factorial design with three observations per cell. High efficiencies are observed across all treatments. Uncertainty in the control of emissions leads to substantial price instability when banking is not allowed. Banking virtually eliminates the instability, but reduces the efficiency of the market institution. Share trading reduces trading volumes, increases price stability, and improves efficiency.     

The additionality problem with offsets: Optimal contracts for carbon sequestration in forests

Carbon offsets are a frequently discussed tool for reducing the costs of an emissions reduction policy. However, offsets have a basic problem stemming from asymmetric information. Sellers of offsets have private information about their opportunity costs, leading to concerns about whether offsets are additional. Non-additional offsets can undermine a cap-and-trade program or, if the government purchases them directly, result in enormous government expenditures. We analyze contracts for carbon sequestration in forests that mitigate the asymmetric information problem. Landowners are offered a menu of two-part contracts that induces them to reveal their type. Under this scheme, the government is able to identify ex post how much additional forest each landowner contributes and minimize ex ante its expenditures on carbon sequestration. To explore the performance of the contracting scheme, we conduct a national-scale simulation using an econometric model of land-use change. The results indicate that for an increase in forest area of 61 million acres, government expenditures are $5.3 billion lower under the contracting approach compared to a uniform subsidy offered to all landowners. This compares to an increase in private opportunity costs of just $110 million dollars under the contracts. Thus, the contracting scheme is preferable from society's perspective.     

Enforcement and price controls in emissions trading

This paper examines how enforcement affects the structure and performance of emissions trading programs with price controls under uncertainty about firms' abatement costs. The analysis highlights how an enforcement strategy can cause abatement-cost risk to be transmitted to enforcement costs via the price of permits. When this occurs, accommodating the effect of abatement-cost risk with an optimal policy results in higher expected emissions and lower expected permit price than their second-best optimal values. However, it is possible to design an enforcement strategy that shields enforcement costs from abatement-cost risk by tying sanctions directly to permit prices. This enforcement strategy stabilizes enforcement effort, the optimal permit supply and price controls are independent of enforcement costs, and the policy produces the second-best optimal outcome.     

Unintended consequences of price controls: An application to allowance markets

Price controls established in a cap-and-trade allowance market are intended to reduce cost uncertainty by constraining allowance prices between a ceiling and floor; however, they could provide opportunities for strategic actions by firms that would lower government revenue and increase emissions. In particular, when the ceiling price is supported by introducing new allowances into the market, firms could choose to buy allowances at the ceiling price, regardless of the prevailing market price, in order to lower the equilibrium price of all allowances. Those purchases could either be transacted by firms intending to manipulate the market price or be induced through the introduction of inaccurate information about the cost of emissions abatement. Theory and simulations using allowance elasticity estimates for U.S. firms suggest that the manipulation could be profitable under the stylized setting and assumptions evaluated in the paper, although in practice many other conditions will determine its use.     

Incorporating the Effects of Socioeconomic Uncertainty into Priority Setting for Conservation Investment

Abstract:  Uncertainty in the implementation and outcomes of conservation actions that is not accounted for leaves conservation plans vulnerable to potential changes in future conditions. We used a decision-theoretic approach to investigate the effects of two types of investment uncertainty on the optimal allocation of global conservation resources for land acquisition in the Mediterranean Basin. We considered uncertainty about (1) whether investment will continue and (2) whether the acquired biodiversity assets are secure, which we termed transaction uncertainty and performance uncertainty, respectively. We also developed and tested the robustness of different rules of thumb for guiding the allocation of conservation resources when these sources of uncertainty exist. In the presence of uncertainty in future investment ability (transaction uncertainty), the optimal strategy was opportunistic, meaning the investment priority should be to act where uncertainty is highest while investment remains possible. When there was a probability that investments would fail (performance uncertainty), the optimal solution became a complex trade-off between the immediate biodiversity benefits of acting in a region and the perceived longevity of the investment. In general, regions were prioritized for investment when they had the greatest performance certainty, even if an alternative region was highly threatened or had higher biodiversity value. The improved performance of rules of thumb when accounting for uncertainty highlights the importance of explicitly incorporating sources of investment uncertainty and evaluating potential conservation investments in the context of their likely long-term success.     

Importance of Baseline Specification in Evaluating Conservation Interventions and Achieving No Net Loss of Biodiversity

There is an urgent need to improve the evaluation of conservation interventions. This requires specifying an objective and a frame of reference from which to measure performance. Reference frames can be baselines (i.e., known biodiversity at a fixed point in history) or counterfactuals (i.e., a scenario that would have occurred without the intervention). Biodiversity offsets are interventions with the objective of no net loss of biodiversity (NNL). We used biodiversity offsets to analyze the effects of the choice of reference frame on whether interventions met stated objectives. We developed 2 models to investigate the implications of setting different frames of reference in regions subject to various biodiversity trends and anthropogenic impacts. First, a general analytic model evaluated offsets against a range of baseline and counterfactual specifications. Second, a simulation model then replicated these results with a complex real world case study: native grassland offsets in Melbourne, Australia. Both models showed that achieving NNL depended upon the interaction between reference frame and background biodiversity trends. With a baseline, offsets were less likely to achieve NNL where biodiversity was decreasing than where biodiversity was stable or increasing. With a no‐development counterfactual, however, NNL was achievable only where biodiversity was declining. Otherwise, preventing development was better for biodiversity. Uncertainty about compliance was a stronger determinant of success than uncertainty in underlying biodiversity trends. When only development and offset locations were considered, offsets sometimes resulted in NNL, but not across an entire region. Choice of reference frame determined feasibility and effort required to attain objectives when designing and evaluating biodiversity offset schemes. We argue the choice is thus of fundamental importance for conservation policy. Our results shed light on situations in which biodiversity offsets may be an inappropriate policy instrument Importancia de la Especificación de Línea de Base en la Evaluación de Intervenciones de Conservación y la Obtención de Ninguna Pérdida Neta de la Biodiversidad     

The environment as a factor of production

This paper uses firm-level data about electric utilities to develop an empirical model of how electric utilities use and bank SO₂ pollution permits under the Acid Rain Program. The empirical model considers emissions, fuels, and labor as variable inputs with quasi-fixed stocks of permits and capital. Consequently, substitution possibilities between the environment and other production factors can be measured and tested. The results reveal substantial substitution between emissions, permit stocks, capital, fuel, and labor. The empirical findings also indicate that firms bank permits primarily as a hedge against uncertainty and for other firm-specific reasons. Overall, the results suggest that cap-and-trade approaches can reduce the cost of meeting environmental goals by providing a mechanism for addressing regulatory and market risks and by signaling an appropriate price for factor use, especially irreversible capital investments.     

The environment as a factor of production

This paper uses firm-level data about electric utilities to develop an empirical model of how electric utilities use and bank SO₂ pollution permits under the Acid Rain Program. The empirical model considers emissions, fuels, and labor as variable inputs with quasi-fixed stocks of permits and capital. Consequently, substitution possibilities between the environment and other production factors can be measured and tested. The results reveal substantial substitution between emissions, permit stocks, capital, fuel, and labor. The empirical findings also indicate that firms bank permits primarily as a hedge against uncertainty and for other firm-specific reasons. Overall, the results suggest that cap-and-trade approaches can reduce the cost of meeting environmental goals by providing a mechanism for addressing regulatory and market risks and by signaling an appropriate price for factor use, especially irreversible capital investments.     

Strategic climate policy with offsets and incomplete abatement: Carbon taxes versus cap-and-trade

This paper provides a first analysis of a “policy bloc” of fossil fuel importers which implements an optimal climate policy, faces a (non-policy) fringe of other fuel importers, and an exporter bloc, and purchases offset from the fringe. We compare a carbon tax and a cap-and-trade scheme for the policy bloc, in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe. The policy bloc is shown to prefer a tax over a cap, since only a tax reduces the fuel export price and by more when the policy bloc is larger. Offsets are also more favorable to the policy bloc under a tax than under a cap. The optimal offset price under a carbon tax is below the tax rate, while under a cap and free quota trading the offset price must equal the quota price. The domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small. When the policy bloc is larger, the offset price can be higher under a cap. Fringe countries gain by mitigation in the policy bloc, more under a carbon tax since the fuel import price is lower.     

Economic Growth and Biodiversity Loss in an Age of Tradable Permits

Abstract:  Tradable permits are increasingly becoming part of environmental policy and conservation programs. The efficacy of tradable permit schemes in addressing the root cause of environmental decline—economic growth—will not be achieved unless the schemes cap economic activity based on ecological thresholds. Lessons can be learned from the largest tradable permit scheme to date, emissions trading now being implemented with the Kyoto Protocol. The Kyoto Protocol caps neither greenhouse gas emissions at a level that will achieve climate stability nor economic growth. If patterned after the Kyoto Protocol, cap-and-trade schemes for conservation will not ameliorate biodiversity loss either because they will not address economic growth. In response to these failures to cap economic growth, professional organizations concerned about biodiversity conservation should release position statements on economic growth and ecological thresholds. The statements can then be used by policy makers to infuse these positions into the local, national, and international environmental science-policy process when these schemes are being developed. Infusing language into the science-policy process that calls for capping economic activity based on ecological thresholds represents sound conservation science. Most importantly, position statements have a greater potential to ameliorate biodiversity loss if they are created and released than if this information remains within professional organizations because there is the potential for these ideas to be enacted into law and policy.     

Co-benefits and additionality of the clean development mechanism: An empirical analysis

The Clean Development Mechanism (CDM) allows industrialized countries to comply with the Kyoto Protocol by using carbon offsets from developing countries. There are two puzzles within this carbon market: additionality (the proposed activity would not have occurred in its absence) and co-benefits (the project has other environmental benefits besides climate mitigation). This paper proposes an econometric approach to evaluate the CDM effect on sulfur dioxide emission reductions and assess its additionality indirectly. Our empirical model is applied to China's emissions at the prefecture level. We found that the CDM does not have a statistically significant effect in lowering sulfur dioxide emissions. This result casts doubt on additionality of these CDM activities, that is, they would have happened anyway.     

Thin versus Thick CO2 Market

The idea that trading is more costly the thinner the market is is common in most studies of market exchange with frictions. Surprisingly, this element is lacking from previous attempts to allow for frictions in pollution permit markets. This paper considers a CO₂ cap-and-trade model where trading costs develop endogenously as a function of the market size. The pre-trade allocation of permits determines whether the market size can be strongly influenced by expectations that have a role because of adjustment costs. The pre-trade allocation also sets preconditions for endogenously vanishing trading costs and thus has nonstandard effects on long-run trading levels and market allocations.     

中国燃煤电厂碳排放量计算及分析

人类活动造成的温室气体排放已经对自然生态造成了巨大的影响。如果无法有效解决气候变化问题,到2030年将有超过1亿人因此而失去生命,且全球经济增长将削减3.2%。有效地控制和减少温室气体的排放是人类急需解决的问题。目前中国温室气体排放总量已经超越美国成为全球第一大温室气体排放国,中国的能源结构决定了中国燃煤发电是中国CO2主要排放源之一,因此实现燃煤发电碳减排对降低中国碳排放总量,减少温室气体排放具有重要意义。准确地计算燃煤电厂产生的碳排放量是进行碳排放权交易、低碳火电厂在经济上具有可行性,最终实现燃煤电厂碳减排的前提条件之一。本研究根据世界资源研究所提供的计算工具首先界定了本研究对于碳排放计算的范围,其次阐述了不同电厂应针对其使用的燃煤进行工业分析的精细化程度不同而采用不同的计算方法,最后对两组不同机组类型的中国火电厂进行了碳排放量计算和对比分析。根据以上分析得出了大容量、高参数的燃煤发电机组相比小容量发电机组不仅能提高能源利用效率,同时也能相对减少因生产电能而产生的CO2排放。其次,燃煤电厂CO2排放中煤炭固定燃烧占有绝对比例,脱硫及外购电力所占比例较小,但排放的绝对总量并不小。再次,由于大容量、高参数机组与小容量发电机组相比在生产单位电能所消耗的燃煤量更少、其排放的废弃中的CO2浓度相对较高,应此更适合安装碳捕捉系统,有助于提高捕捉效率,降低捕捉CO2的成本。因此,建议在未来建设碳捕捉系统时应优先选择大容量、高参数机组。本研究的创新点在于在上述研究的基础上考虑单个燃煤电厂的煤质、考虑电厂脱硫、外购电力的因素,根据电厂对煤质不同程度的工业分析采用不同的计算方法,目的在于更?     

A synthesis of current knowledge on forests and carbon storage in the United States

Using forests to mitigate climate change has gained much interest in science and policy discussions. We examine the evidence for carbon benefits, environmental and monetary costs, risks and trade-offs for a variety of activities in three general strategies: (1) land use change to increase forest area (afforestation) and avoid deforestation; (2) carbon management in existing forests; and (3) the use of wood as biomass energy, in place of other building materials, or in wood products for carbon storage. We found that many strategies can increase forest sector carbon mitigation above the current 162-256 Tg C/yr, and that many strategies have co-benefits such as biodiversity, water, and economic opportunities. Each strategy also has trade-offs, risks, and uncertainties including possible leakage, permanence, disturbances, and climate change effects. Because approximately 60% of the carbon lost through deforestation and harvesting from 1700 to 1935 has not yet been recovered and because some strategies store carbon in forest products or use biomass energy, the biological potential for forest sector carbon mitigation is large. Several studies suggest that using these strategies could offset as much as 10-20% of current U.S. fossil fuel emissions. To obtain such large offsets in the United States would require a combination of afforesting up to one-third of cropland or pastureland, using the equivalent of about one-half of the gross annual forest growth for biomass energy, or implementing more intensive management to increase forest growth on one-third of forestland. Such large offsets would require substantial trade-offs, such as lower agricultural production and non-carbon ecosystem services from forests. The effectiveness of activities could be diluted by negative leakage effects and increasing disturbance regimes. Because forest carbon loss contributes to increasing climate risk and because climate change may impede regeneration following disturbance, avoiding deforestation and promoting regeneration after disturbance should receive high priority as policy considerations. Policies to encourage programs or projects that influence forest carbon sequestration and offset fossil fuel emissions should also consider major items such as leakage, the cyclical nature of forest growth and regrowth, and the extensive demand for and movement of forest products globally, and other greenhouse gas effects, such as methane and nitrous oxide emissions, and recognize other environmental benefits of forests, such as biodiversity, nutrient management, and watershed protection. Activities that contribute to helping forests adapt to the effects of climate change, and which also complement forest carbon storage strategies, would be prudent.     

Do renewable energy policies reduce carbon emissions? On caps and inter-industry leakage

In a parsimonious two-sector general equilibrium model, we challenge the widely-held tenet that within a cap-and-trade system renewable energy policies have no effect on carbon emissions. If the cap does not capture all sectors, we demonstrate that variations of a renewable energy subsidy change aggregate carbon emissions through an inter-industry leakage effect. We decompose this effect into intuitively intelligible components that depend in natural ways on measurable elasticity parameters. Raising the subsidy always reduces emissions if funded by a lump-sum tax, reinforcing recent findings that tightening environmental regulation can cause negative leakage. However, if the subsidy is funded by a levy on electricity, it can increase emissions. These results provide a valuable basis for an informed design of renewable energy policies and an accurate assessment of their effectiveness. We highlight how a state-of-the-art statistic used by governments to gauge such effectiveness, “virtual emission reductions”, is biased, because inter-industrial leakage effects are not captured.     

Modeling the impact of uncertainty in emissions trading markets with bankable permits

The various forms of uncertainty that firms may face in bankable emission permit trading markets will affect firms’ decision making as well as their market performance. This research explores the effect of increased uncertainty over future input costs and output prices on the temporal distribution of emission. In a dynamic programming setting, the permit price is a convex function of stochastic prices of coal and electricity. Increased uncertainty about future market conditions increases the expected permit price and causes a risk neutral firm to reduce ex ante emissions in order to smooth out marginal abatement costs over time. Finally, safety valves, both low-side and high-side, are suggested to reduce the impact of uncertainty in bankable emission trading markets.     

Benefits and challenges of streamlined life-cycle assessment for SMEs – findings from case studies on climate change impacts

ABSTRACT

Small and medium-sized enterprises (SMEs) have a substantial role in the economy and job creation, but they are a remarkable source of environmental impacts. SMEs often lack skills and resources to compile environmental impact assessments; Streamlined Life Cycle Analysis (LCA) can provide efficient tools for this. An application of streamlined LCA relying heavily on database data, LCA clinic, was developed and tested on 23 SMEs in Finland. The climate change impacts were mainly caused by the production of raw materials, electricity and heating, whereas packaging and transportation were not influential. A significant amount of emissions were indirect, i.e. caused by production of raw materials. Thus, decreasing emissions from raw material production or selecting raw materials with a smaller environmental load could be a more efficient way to decrease emissions than reducing direct emissions such as those from electricity use. Lack of data in the LCA-databases was considered a challenge. An access to regionally customised datasets is important for the implementation of LCA clinics. Company feedback indicated that LCA clinics were useful in climate-friendly product design and increased environmental awareness, but did not lead to immediate actions to reduce emissions because of inadequate investment capabilities. Company managers had limited possibilities to use the results in marketing as comparative assessments would require a full LCA. Many company managers were willing to pay a fee sufficient to cover the costs of an LCA clinic, but some considered that the costs should be covered by external funding sources.     

Environmental policy à la carte: Letting firms choose their regulation

Under uncertainty, the optimal choice between price and quantity instruments depends on the technology of the regulated firms, which is often private information. We consider an environmental policy that delegates the prices-versus-quantities decision to the firms by offering them the choice between an emissions tax and permit trading. Such an approach is currently used in Swiss climate policy. We provide a detailed characterization of the optimal policy and show that this approach reduces expected social costs compared to a pure tax or permit-trading regime. We demonstrate that an optimal allocation of firms to instruments can be achieved despite substantial informational constraints, and that all firms gain from the introduction of the instrument choice compared to optimally designed single-instrument policies. Furthermore, we discuss the conditions under which this approach is likely to be preferable to a hybrid regulation.     

Learning and climate feedbacks: Optimal climate insurance and fat tails

We study the effect of potentially severe climate change on optimal climate change policy, accounting for learning and uncertainty in the climate system. In particular, we test how fat upper tailed uncertainty over the temperature change from a doubling of greenhouse gases (the climate sensitivity), affects economic growth and emissions policy. In addition, we examine whether and how fast uncertainties could be diminished through Bayesian learning. Our results indicate that while overall learning is slow, the mass of the fat tail diminishes quickly, since observations near the mean provide evidence against fat tails. We denote as “tail learning” the case where the planner rejects high values of the climate sensitivity with high confidence, even though significant uncertainty remains. Fat tailed uncertainty without learning reduces current emissions by 38% relative to certainty, indicating significant climate insurance, or paying to limit emissions today to reduce the risk of very high temperature changes, is optimal. However, learning reduces climate insurance by about 50%. The optimal abatement policy is strongly influenced by the current state of knowledge, even though greenhouse gas (GHG) emissions are difficult to reverse. Once the mass of the fat tail diminishes, the remaining uncertainty is largely irrelevant for optimal emissions policy.