Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges

A major concern with tradable emission permits is that stochastic permit prices may reduce a firm’s incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge. However, under efficient permit trading, the permit price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. We develop a rational expectations general equilibrium model of permit trading and irreversible abatement investment to show how cost uncertainties affect investment under permits. We compare the resulting investment incentive with that under charges. After controlling for the assumption that random shocks affect the abatement cost linearly, we find that firms’ investment incentive decreases in cost uncertainties, but more so under emissions charges than under permits. Therefore, tradable permits in fact may help maintain firms’ investment incentive under uncertainty.     

Technology adoption decisions under a mixed regulatory system of tradable permits and air pollution fees for the control of Total Suspended Particulates in Taiwan

By using a newly proposed tradable permit system built under the current air pollution fee regulation for the control of Total Suspended Particulates in Taiwan as an example, a mixed-integer non-linear programming model that minimizes the total regulatory costs of firms is applied to investigate how different permit trading ratios and the design of banking might affect firms’ technology adoption decisions and permit trading behavior. By incorporating binary variables in the model to represent firms’ decisions as to whether or not to install new control equipment, the results show that when the unit air pollution fee rate is higher than the firms’ abatement costs, the design of banking causes many firms to install new control equipment that results in an over-reduction of emissions. If no air pollution fee is imposed, the trading ratio plays a more important role than the reservation rate for banking in determining the firms’ emission reduction strategies under a pure permit trading scheme. While the conclusion from this study that uses a non-uniformly mixed pollutant as an example may hold only when certain conditions are met, the framework can be applied to other uniformly mixed pollutants through parameter changes without any limitation. In addition, the modeling technique presented here offers policy-makers a very convenient approach to empirical analysis.      

Livestock emissions regulation with unknown damages and strategic technology adoption

Livestock emissions have been identified as a contributor to greenhouse gas build-up yet have remained unregulated in the US. A game-theoretic model in the style of Tarui and Polasky (2005) was analysed where the dairy industry strategically chooses to abate air emissions with technology adoption and herd size decisions while a regulator chooses a tax rate on emissions to satisfy the desires of competing interest groups. This model allows the effects of potential air emission regulation on the dairy industry to be evaluated. Results demonstrate that dairy farms react to the increased cost of air regulation by decreasing herd size rather than investing in air emission abatement technology in the short run. This suggests that incentives may need to be put in place to induce adoption in emissions abatement technology at the livestock level in the long run.     

On the option to invest in pollution control under a regime of tradable emissions allowances

Abstract.  Optimal decisions of a firm facing the option of retrofitting its plant to reduce pollution and thereby eliminate the need to purchase emissions allowances are analysed. The decision is treated as a real option with the price of pollution permits following a known stochastic process. The model is formulated as a set of one‐dimensional partial differential equations. At discrete points in time, the firm owner makes optimal decisions about the retrofit, including whether to mothball temporarily. The model is used to analyse a firm's decision to instal a scrubber as a result of the 1990 U.S. Clean Air Act. JEL Classification: Q25, D81, G31
Sur la possibilité d'investir dans le contrôle de la pollution dans un régime de permis d'émission de pollution échangeables commercialement.  Ce mémoire examine les décisions optimales d'une entreprise face à la possibilité d'adapter ses installations pour réduire la pollution, et ce faisant d'éliminer le besoin de se procurer des permis d'émission de pollution sur le marché. Le décision est traitée comme une option réelle où le prix des permis résulte d'un processus stochastique connu. Le modèle est formulé sous forme d'un ensemble d'équations différentielles partielles à une dimension. A des points discontinus dans le temps, le propriétaire de l'entreprise prend des décisions optimales de mise à niveau des installations – y compris la possibilité de les fermer temporairement. Le modèle est utilisé pour analyser une décision d'installer un épurateur suite à la mise en place de la loi américaine de 1990 (Clean Air Act).     

Taxesversus tradable discharge permits: A review in the light of the U.S. and European experience

The U.S. and West European environmental protection programs have incorporated different economic instruments for controlling pollution. The U.S. has made extensive use of tradable permits of several forms but has never used direct pollution taxes. The countries of the European Community have long used an array of pollution taxes but have never used tradable permits. A review and critique of these experiences and an analysis of the attributes of taxes and tradable permits seeks identify the strengths and weaknesses of each instrument and to provide guidelines for the successful implementation of each system.     

EU-type carbon emissions trade and the distributional impact of overlapping emissions taxes

The European Union fulfills its emissions reductions commitments by means of an emissions trading scheme covering some part of each member state’s economy and by national emissions control in the rest of their economies. The member states also levy energy/emissions taxes overlapping with the trading scheme. We investigate the impact of that double regulation on the distribution of national welfares. In certain very special cases emissions tax increases turn out to be exactly offset by permit price reductions such that permit-exporting [permit-importing] countries lose [gain] from an increase in the overlapping emissions tax. These results are not general due to market-interdependence effects, which may even reverse the sign of welfare changes. For that ambiguity and other reasons the case is made for abolishing overlapping taxes.     

Applying tradable permits to biodiversity conservation: Effects of space-dependent conservation benefits and cost heterogeneity on habitat allocation

This paper is concerned with the cost-effective allocation of habitat for species under spatio-temporally heterogeneous economic development. To address the dynamic dimension of the problem we consider tradable development rights as the instrument of choice. A particular challenge in applying tradable development rights is that the conservation benefit of an individual habitat patch depends on its spatial relationship with other habitat patches and thus is an emergent rather than a fixed property. We analyse with a conceptual model the spatial and temporal dynamics of habitats in a region under a tradable development rights market that takes spatial interaction of habitats explicitly into account. In our analysis two different outcomes may emerge depending on the levels of spatial interaction and cost heterogeneity: an “ordered” structure where habitat patches are clustered in space and are stable over time, and a “disordered” structure where habitat patches are scattered in space and subject to high turnover of destruction and recreation. A high level of spatial interaction or a low level of cost heterogeneity favours an ordered structure while a low level of spatial interaction or a high level of cost heterogeneity favours a disordered structure.     

Emission taxes and the adoption of cleaner technologies: The case of environmentally conscious consumers

We model a market with environmentally conscious consumers and a duopoly in which firms consider the adoption of a clean technology. We show that as pollution increases, consumers shift more resources to the environmental activities, thereby affecting negatively the demand faced by the duopoly. This effect generates incentives for firms to adopt the clean technology even in the absence of emissions taxes. When such taxes are considered, our results indicate that the benefit of adopting the clean technology is initially increasing and then decreasing in the emission tax. The range of values for which the emission tax increases this benefit becomes narrower when the consumers’ environmental awareness is stronger.     

Taxation and the sustainability of collusion: ad valorem versus specific taxes

Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation that results in the same collusive price has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly when collusion is sustained with Nash-reversion strategies or optimal-punishment strategies. In a Cournot duopoly model with linear demand and quadratic costs, it is shown that the critical discount factor is lower with an ad valorem tax than with a specific tax that results in the same collusive price. However, in contrast to Colombo and Labrecciosa (J Public Econ 97:196–205, 2013) it is shown that the revenue is always higher with an ad valorem tax than with a specific tax.     

Prices versus quantities: environmental regulation and imperfect competition

By exercising market power, a firm will distort the production, and therefore the emissions decisions, of all firms in the market. This paper examines how the welfare implications of strategic behavior depend on how pollution is regulated. Under an emissions tax, aggregate emissions do not affect the marginal cost of polluting. In contrast, the price of tradable permits is endogenous. I show when this feedback effect increases strategic firms’ output. Relative to a tax, tradable permits may improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in a Mid-Atlantic electricity market. Simulations suggest that exercising market power decreased emissions locally, thereby substantially reducing the regional tradable permit price. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been even greater.     

Profits and politics: Coordinating technology adoption in agriculture

This paper examines the political economy of government-led coordination of economic activity in a simple two-sector model in which individuals' choice of agricultural technology affects industrialization. We demonstrate the existence of multiple equilibria; the economy is either characterized by the use of a traditional agricultural technology and a low level of industrialization or the use of a mechanized technology and a high level of industrialization. Relative to the traditional technology, use of the mechanized technology increases output but leaves some population groups worse off. We show that the distributional implications of choosing the mechanized technology restrict the possibility of Pareto-improving coordination by an elected policy-maker, even when we allow for income redistribution.     

Individualism and the adoption of clean energy technology

Why do 20% of Swedes report having adopted a clean energy system while the corresponding share of Spaniards equals 0.4%? Using data for about 25,000 individuals across 33 countries, this study tests which cultural trait, individualism or collectivism, is associated with greater levels of clean technology adoption. Our fractional probit estimates suggest that individualistic individuals are more inclined to adopt clean energy systems for home and transport purposes. In particular, the adoption probability rises by an estimated 2% if a person exhibits individualistic values. This finding is not driven by country-specific tax or subsidy policies or market-specific determinants and is robust to controlling for individual and household characteristics, attitudes, social and personal norms and other significant dimensions of cultural differences. The results, therefore, facilitate an understanding of how the decision to adopt clean energy technologies can be driven by cultural factors.     

Profits and politics: Coordinating technology adoption in agriculture

This paper examines the political economy of government-led coordination of economic activity in a simple two-sector model in which individuals' choice of agricultural technology affects industrialization. We demonstrate the existence of multiple equilibria; the economy is either characterized by the use of a traditional agricultural technology and a low level of industrialization or the use of a mechanized technology and a high level of industrialization. Relative to the traditional technology, use of the mechanized technology increases output but leaves some population groups worse off. We show that the distributional implications of choosing the mechanized technology restrict the possibility of Pareto-improving coordination by an elected policy-maker, even when we allow for income redistribution.     

Taxes,permits, and the diffusion of a new technology

This study looks at the effects of the choice between taxes and permits on the pattern of adoption of a new (pollution) emissions abatement technology. It uses a dynamic setting, where the regulator observes the arrival and initial use of the technology and determines the optimal ex post amount of emissions before firms start to adopt the technology.In the model here, the adoption benefits and costs depend on the number of firms that are already using the technology. Thus, each firm decides the optimal date to adopt the technology, considering its benefits and costs, as well as the advantage they will gain over their rivals, producing a sequence of adoption that is “diffused” into the industry over time.With this framework, the study shows that when the output demand is elastic, auctioned permits induce an earlier diffusion than taxes.     

On the interaction between education and social security

This paper uses an overlapping generations model with endogenous fertility choices to analyze the quantitative costs and benefits of subsidizing higher education, paying particular attention to the interaction between such policy and the sustainability of the social security system. The paper focuses on the demographic change as the mechanism that link both policies. It is found that an increase in education subsidies changes the educational composition of the population and lowers average fertility. Lower average fertility and higher life expectancy of educated individuals translates into changes in the age structure of the population that requires an increase in the social security tax rate in order to balance the pension budget. Such process reduces the welfare benefits of this educational policy since the rise in social security taxes lowers the after-tax lifetime earnings of almost all individuals born in the period of the policy reform and over.     

走近农村税费改革

为建立规范的农村税费制度,从根本上减轻农民负担,党中央、国务院1999年在安徽省部分县进行农村税费改革(以下简称税改)试点的基础上,正式部署全国税改试点工作。安徽省作为试点省已于2000年6月份正式启动。税改正在走近,已不容我们不思考应对。此次税改怎么改?对农业大县的漳浦有哪些影响?我们必须采取哪些措施应对?笔者根据近段的农村调查作些粗     

Primary energy substitution models: On the interaction between energy and society

This paper describes an attempt to develop a “synthetic” model of primary energy substitution, using certain rules which proved fruitful in describing the substitution of other commodities. This model will be used for forecasting, and for checking the validity of certain objectives set for R&D in the field of energy.     

Principles versus principal: Reconciling norm compliance and shareholder value

This paper considers situations where an agent (say, a polluting firm's CEO) must allocate his nonobservable effort across two distinct tasks (say, revenue/market share enhancement and environmental stewardship), and where two principals (say, the firm's shareholders and an external stakeholder) hold diverging viewpoints on what the best allocation should be. Both characteristics of this context—multitasking and conflicting principals—are normally seen as obstacles to strengthening the agent's incentives. This paper proposes a simple arrangement, based on contingent monitoring and clawbacks, that can overcome these obstacles. Under this arrangement, the principals would end up coordinating their respective incentive schemes so that the agent considers his two tasks as complementary utility‐increasing activities. Applications to regulatory compliance, corporate social responsibility, and innovation management are briefly sketched.     

Resistance to technology adoption: The rise and decline of guilds

This paper analyzes the decision of a group of specialized workers to form a guild and block the adoption of a new technology that does not require their specialized input. The theory predicts an inverted-U relation between guilds and market size: for small markets, firm profits are insufficient to cover the fixed cost of adopting the new technology, and hence, specialized workers have no reason to form guilds; for intermediate sized markets, firm profits are large enough to cover the higher fixed costs, but not large enough to defeat workers' resistance, and so workers form guilds and block adoption; and for large markets, these profits are sufficiently large to overcome worker resistance and so guilds disband and the more productive technology diffuses throughout the economy. We show that this inverted-U relation between guilds and market size predicted by our theory exists in a dataset of Italian guilds from the 14th to the 19th century.     

Tariffs and the adoption of clean technology under asymmetric information

Abstract.  This paper examines the effect of a tariff on the decision of a foreign monopolist to adopt 'clean' technology, which reduces the flow of a negative cross-border externality. The clean technology increases the marginal cost of production relative to the dirty technology, but only the firm knows the extent of the increase. Under complete information, despite its protectionist motivation, the importing country's optimal tariff induces the firm to adopt the clean technology if and only if it is globally efficient to do so. Under incomplete information, this efficiency property is disrupted, and the firm biases its choice in favour of dirty technology. JEL classification: F13, F18