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Output-based allocations (OBAs) are typically used in emission trading systems (ETS) with a fixed cap to mitigate leakage in sectors at risk. Recent work has shown they may also be welfare enhancing in markets subject to supply and demand shocks by introducing some flexibility in the total cap, resulting in a carbon price closer to marginal damage. We extend previous work to simultaneously include both leakage and volatility. We study how OBA permits can be implemented under an overall cap that may change with the level of production in contrast with a design that deducts OBA permits from the overall permit allocation as is the current practice in the EU-ETS and California. We show that introducing OBA permits while keeping the overall cap fixed would only increase price fluctuations and induce severe welfare losses to non-OBA sectors.
JEL Classication: D24, L13, H23, L74
Keywords: pollution markets, carbon price volatility, output-based allocations,
We study pollution permit markets in which a fraction of permits are allocated to firms based on their output. Output-based allocations, which are receiving increasing attention in the design of carbon markets around the world (e.g., Europe, California, New Zealand), are shown to be optimal under demand and supply volatility despite the output distortions they may create. In a market that covers multiple sectors, the optimal design combines auctioned permits with output-based allocations that are specific to each sector and increasing in its volatility. When firms are better informed about the latter or must self select, the regulator resorts to some free (i.e., lump-sum) allocations to sort firms out.
JEL Classication: D24, L13, H23, L74
Keywords: pollution markets, output-based allocations, market volatility, rent-
seeking, self-selection, climate policy
The adverse effects of black carbon (BC) emissions from diverse sources are significant in human and economic terms. BC emissions are a public health problem, as they annually cause premature deaths on the order of millions worldwide. BC also has detrimental effects on food supplies, with crop production reduced by millions of tonnes per year. In addition, BC has significant climate change consequences, with a Global Warming Potential per tonne on the order of thousands of times greater than carbon dioxide’s over a 20-year period; in terms of total global warming impact, BC is second after carbon dioxide and thus greater than other greenhouse gases, including methane. Emissions mitigation technologies and government policies offer potential health, food and climate co-benefits. Within the transportation sector, there are many technologies and policies that can mitigate BC emissions; for example, inter-modal transfers of diesel particulate filter (DPF) technology from motor vehicles to maritime shipping offer a promising BC mitigation path. BC not only poses significant tangible technological issues; it also poses important political-economy conceptual issues with practical implications for industry and government policymaking. First, because of its short atmospheric lifetime average of about one week and concentrated localized depositions, BC poses “local-commons” and “regional-commons” problems as well as “global-commons” problems. Second, because of its localized and regionalized multiple negative externalities, BC challenges the economic efficiency rationale for one-policy-instrument-per-goal. The BC policy agenda thus extends over many levels of governance, and it entails a wide range of policy instruments. The multiplicity of policy instruments at multiple levels of governance are reflected in the assessment of existing policies and in the diversity of recommendations for further policymaking and research: (1) BC emission measurement deficiencies for motor vehicles and aviation need to be corrected, and a maritime shipping protocol in the International Maritime Organization should be finalized and adopted. (2) In addition to on-road motor vehicles, local BC emission reduction initiatives should be adopted, especially in large cities with seaports and airports. These programs should encompass all diesel engine sources of BC in maritime shipping and aviation port infrastructure areas, including off-road vehicles, loading/unloading equipment, and diesel locomotives. (3) Mitigating BC emissions should be an urgent objective in the International Civil Aviation Organization (ICAO) and International Maritime Organization (IMO). (4) Technology transfer issues, including transfers of diesel particulate filter technologies in motor vehicles and maritime shipping, should be included on the agenda of the Technology Mechanism of the UNFCCC. (5) All maritime shipping Emission Control Areas (ECAs) should include BC emission limits. (6) An Arctic Black Carbon Agreement in the form of a “carbon club” should be developed. (7) Annual COP meetings and other activities of the UNFCCC should expand recognition that BC mitigation can be included in countries’ Nationally Determined Contributions. (8) The prevailing climate change paradigm should be revised.
Key words: Black Carbon; Soot; Carbon Clubs; Paris Agreement.
JEL classification: F13; F18; O38; Q54; Q58.
Pigovian regulation provides monetary penalties/rewards to incentivize prosocial behavior, and may thereby trigger behavioral effects beyond a more standard response associated with a change in relative prices. This paper quantifies the magnitude of these behavioral effects using data from an experiment on real product choices together with a structural model of consumer behavior. First, we show that information about external effects (products’ embodied carbon emissions) triggers voluntary substitution towards cleaner alternatives, and we estimate that this effect is equivalent to a change in relative prices of GBP30.69-165.15/tCO2. Second, comparing a Pigovian intervention (GBP19/tCO2) with a neutrally-framed price change of the same magnitude, we find a negative behavioral effect associated with regulation. Compensating this bias would require increasing the Pigovian price signal by up to 48.06/tCO2. Finally, based on a cross-product comparison, we show that the magnitude of behavioral effects declines with substitutability between clean and dirty product alternatives, a measure of effort to reduce emissions.
Keywords: Externalities; Pigovian regulation; Consumer behavior; Information; Field experiments; Environmental policy.
JEL Codes: C93; D03; D12; H23; Q58.
Restructuring an electricity sector entails a complex realignment of political and economic institutions, which may both delay and distort the achievement of satisfactorily competitive conditions. In research and planning for policy interventions in power systems under these varied regulatory environments, typical operational models may neglect important interactions between techno-economic criteria and political constraints, leading to poor understanding of underlying causes of inefficiency and to inappropriate recommendations. We develop tractable formulations of the unit commitment problem based on integer clustering of similar units that endogenize important political factors in the Northeast grid region of China. We demonstrate the importance of these interactions on operations and provide a set of options for researchers to explore further pathways for China’s ongoing power system reforms. For example, wind integration, a key policy priority, is inhibited by the interaction of institutions limiting short- and long-term sources of flexibilities in inter-provincial trade.
Nico Keyaerts, Michelle Hallack, Jean-Michel Glachant and William D'haeseleer, September 2010
This paper analyses the value and cost of line-pack flexibility in liberalized gas markets through the examination of the techno-economic characteristics of gas transport pipelines and the trade-offs between the different ways to use the infrastructure: transport and flexibility. Line-pack flexibility is becoming increasingly important as a tool to balance gas supply and demand over different periods. In the European liberalized market context, a monopolist unbundled network operator offers regulated transport services and flexibility (balancing) services according to the network code and the balancing rules. Therefore, gas policy makers should understand the role and consequences of line-pack regulation. The analysis shows that the line-pack flexibility service has an important economic value for the shippers and the TSO. Furthermore, the analysis identifies distorting effects in the gas market due to inadequate regulation of line-pack flexibility: by disregarding the fixed cost of the flexibility in the balancing rules, the overall efficiency of the gas system is decreased. Because a full market based approach to line-pack pricing is unlikely, a framework is presented to calculate a cost reflective price for pipeline flexibility based on the trade-offs and opportunity costs between the right to use the line-pack flexibility and the provision of transport services.