ALTERNATIVE FUELS FOR POLLUTION CONTROL: AN EMPIRICAL EVALUATION OF BENEFITS AND COSTS

In July 1989, the Bush administration proposed a new, dramatic approach to constructing clean air legislation. In particular, the Bush proposal calls for using alternative fuels as an important component to reducing urban ozone and carbon monoxide. This paper summarizes the Bush proposal, looks briefly at other options to reduce urban air pollution, and empirically evaluates the cost effectiveness of alternative fuels as an air pollution control strategy. The paper finds that the cost per ton of emissions reduced–the measure of cost effectiveness–varies dramatically as the price of gasoline vis a vis the price of the alternative fuel changes. For this reason, the authors believe that new clean air legislation should allow for great flexibility so as to allow states to incorporate alternative fuels when they are cost effective. If oil prices turn out to be lower than expected, then forcing urban centers to adopt relatively more expensive alternative fuels would impose high costs.     

Why energy transitions matter: A case study of methanol

The 1990 Clean Air Act Amendments (CAAA) contain several new provisions governing emissions from motor vehicles. These provisions of the 1990 CAAA will have a dramatic impact on the type of cars people drive over the coming decades. Given the high cost of achieving further reductions from automobiles, there has been increasing interest in exploring alternative fuels that improve environmental quality. One important contribution of this study is to highlight the importance of considering transition issues in assessing the cost of alternative fuels. A second contribution of this paper is to demonstrate how the cost-effectiveness of methanol and M85 depends on how a methanol-based strategy is implemented. The analysis of the costs and effectiveness of methanol and gasoline leads to the following conclusions: (1) transition issues are critical in evaluating the cost and cost-effectiveness of methanol-based fuels; (2) M85 and M100 are likely to be expensive relative to conventional gasoline, particularly in the near term and short term; (3) cost-effectiveness varies dramatically by region, with Los Angeles and New York substantially better than Houston; and (4) widespread introduction of methanol is not likely to be a cost-effective approach for improving urban air quality.Mr. Hahn is a Resident Scholar at the American Enterprise Institute and an Adjunct Professor of Economics at Carnegie Mellon University. Mr. Borick was a Research Assistant at the American Enterprise Institute at the time this paper was written. Several people contributed to this paper. First and foremost, we would like to thank Armistead Russell for help in characterizing vehicle emissions. In addition, we would like to thank Jeff Alson, Vann Bussman, Alex Cristofaro, Mark DeLuchi, Carmen Difiglio, Alan Dunker, Art Fraas, John Heller, Bruce Henning, Russell Jones, Walt Kreucher, Alan Krupnick, Tom Lareau, William Leney, Ben Massell, Alan Mawdsley, Al McGartland, Greg McRae, Bob Oglesby, Dan Sperling, Brian Sullivan, Dan Townsend, Margaret Walls, Douglas Youngblood, Marty Zimmerman, and Don Zinger. This paper represents the views of the authors and does not necessarily reflect the views of any individuals or institutions with which the authors are affiliated.     

Reevaluating the relationship between transferable property rights and command-and-control regulation

Economists generally assume that systems of transferable property rights are preferable to non-market systems. This paper suggests that the design of a market-based policy that dominates a command-andcontrol regime is more subtle than is commonly believed, even in theory. The subtlety arises because identical approaches to monitoring and enforcement will not generally yield the same results in different regulatory environments. The paper identifies conditions under which a kind of market dominance result obtains. The theory is then applied to the problem of trading rights to emit pollutants from motor vehicles.Mr. Hahn is a Resident Scholar at the American Enterprise Institute and an Adjunct Professor of Economics at Carnegie University. Mr. Axtell is a Research Associate at the Brookings Institution. We would like to thank Linda Cohen, Glenn Loury, Eric Stork, and participants in the Harvard environmental economics workshop and the Stanford environmental economics conference for constructive comments. Jeff Alson, Richard Wilcox, and Don Zinger helped identify useful data sources. This research was supported in part by a grant from the National Science Foundation.     

Climate Change Taxes and Energy Efficiency in Japan

In 2003 Japan proposed a Climate Change Tax to reduce its CO₂ emissions to the level required by the Kyoto Protocol. If implemented, the tax would be levied on fossil fuel use and the revenue distributed to encourage the purchase of energy efficient equipment. Analysis using the MIT Emissions Prediction and Policy Analysis (EPPA) model shows that this policy is unlikely to bring Japan into compliance with its Kyoto target unless the subsidy encourages improvement in energy intensity well beyond Japan’s recent historical experience. Similar demand-management programs in the US, where there has been extensive experience, have not been nearly as effective as they would need to be to achieve energy efficiency goals of the proposal. The Tax proposal also calls for limits on international emission trading. We find that this limit substantially affects costs of compliance. The welfare loss with full emissions trading is 1/6 that when Japan meets its target though domestic actions only, the carbon price is lower, and there is a smaller loss of energy-intensive exports. Japan can achieve substantial savings from emissions trading even under cases where, for example, the full amount of the Russian allowance is not available in international markets.     

Emissions Trading Mode in America and China and Its Future

The emissions trading is a kind of sustainable development measures that is based on market mechanism, and its growing is closely connected with the market development level. The level of American emissions permits market is relatively high, and also predicts the prospect of professional bourse pattern. Most of emissions permits transactions in China are organized by government environment authority, which make it lack of market function. Emissions permits is a kind of property rights. It is important and profitable, while the emissions trading market obviously possesses the two-class of original allocation and second-time transfer. But there are some decisive differences between emissions permits and ordinary transaction object, so the specialized bourse for emissions trading should be built.     

Bush v. Gore and the Effect of New Source Review on Power Plant Emissions

New Source Review (NSR) is a Clean Air Act regulation that requires electric utilities to meet emission standards when making modifications to existing power plants. The regulation increases the cost of replacing worn out parts, and limits the firm’s scope of potential capital investments. Such restrictions may lead to greater retirements and lower utilization, adversely affecting profits. Prior to the 2000 presidential election, investors expected Bush to have a narrower interpretation of NSR than Gore. Therefore, we use changes in stock prices to estimate the effect on profits of differences in NSR policy. Our results indicate that investors expected the average boiler to be $38 million more valuable under the Bush administration. Over the boilers’ lifetimes, the additional utilization will have increased emissions by 19 million tons of sulfur dioxide, 5.9 million tons of nitrogen oxides and 980 million tons of carbon dioxide, relative to natural gas generation.      

Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data

This paper provides an initial analysis of the EU ETS based on the installation-level data for verified emissions and allowance allocations in the first 2 years of the first trading period. These data reveal that CO₂ emissions were about 3% lower than the allocated allowances. The main objective of the paper is to shed light on the extent to which over-allocation and abatement have taken place in 2005 and 2006, when a significant CO₂ price was observed. We propose a measure by which over-allocation can be judged and provide estimates of abatement based on emissions data and indicators of economic activity as well as trends in energy and carbon intensity. Finally, we discuss the insights and implications that emerge from this tentative assessment. The ideas expressed in this paper are those of the authors and do not necessarily represent views of the International Energy Agency or its Member Countries.     

Price discovery and intermediation in linked emissions trading markets: A laboratory study

Many new and proposed emissions trading systems involve multiple countries and regions. The introduction of interregional trading raises questions about how flexible state- or national-level authorities should be in allowing individual firms to trade with firms or authorities in other states or countries. This paper uses laboratory methods to evaluate the efficiency and pricing performance of linking trading across regions at the firm-to-firm level. In one treatment, individual firms trade directly with firms or authorities in other regions. We compare performance in this treatment to an intergovernmental trading treatment, where emissions trading is restricted to occur only between intermediaries. A baseline treatment of autarky, where firms only trade with other firms in their country or region, provides a benchmark to assess the efficiency benefits of allowing linking. Although efficiency and price discovery are both improved by allowing intermediation in linked permit markets, we find that further gains can be realized through direct firm to firm trading. Buyers in high cost regions and sellers in low cost regions benefit the greatest from linking.     

The Brave New World of Carbon Trading

Human-induced climate change has become a prominent political issue, at both national and international levels, leading to the search for regulatory ‘solutions’. Emissions trading has risen in popularity to become the most broadly favoured government strategy. Carbon permits have then quickly been developed as a serious financial instrument in markets turning over billions of dollars a year. In this article, I show how the reality of permit market operation is far removed from the assumptions of economic theory and the promise of saving resources by efficiently allocating emission reductions. The pervasiveness of Greenhouse Gas emissions, strong uncertainty and complexity combine to prevent economists from substantiating their theoretical claims of cost-effectiveness. Corporate power is shown to be a major force affecting emissions market operation and design. The potential for manipulation to achieve financial gain, while showing little regard for environmental or social consequences, is evident as markets have extended internationally and via trading offsets. At the individual level, there is the potential for emissions trading to have undesirable ethical and psychological impacts and to crowd out voluntary actions. I conclude that the focus on such markets is creating a distraction from the need for changing human behaviour, institutions and infrastructure.     

Alternative standards and instruments for air pollution control in Poland

Like other Central European countries, Poland faces the twin challenges of improving environmental quality while also fostering sustainable economic development. In this study we examine the costs of different standards for air pollution control, and the cost savings from using incentive-based policy instruments in lieu of more rigid command-and-control policies. The comparisons are based on the results of a simulation model of energy use and air pollution control for the Polish economy over 1990–2015. The model simulates least-cost energy supply decisions under different environmental policy assumptions, the corresponding emissions, and the cost of achieving the specified policy objectives. The model results suggest that incentive-based policies will have efficiency gains over command policies that are at least worthy of consideration and may be quite substantial. The size of the gains in practice depends in part on how much flexibility is built into the command approach, e.g., capacity for intrafirm trading as well as alack of technology-specific requirements. To achieve these gains, an increase in the current levels of emissions fees is desirable both to strengthen abatement incentives and to improve the capacity of the Polish government to overcome past environmental damages. However, it seems highly unlikely in practice that fees could be raised to the levels necessary to meet current Polish emissions standards. To make further headway, an evolutionary approach to emissions trading patterned after (and profiting from the experience with) emissions trading in the U.S. seems useful. The program could start out relatively modestly and increase in ambitiousness as the Polish economic transition proceeds.     

Emissions Trading and Profitability: The Swedish Pulp and Paper Industry

The purpose of this paper is to develop models with and without potential emissions trading and to compare industry profits under the two regimes. The model in which emissions trading is permitted is a nonparametric industry frontier model in the spirit of Färe et al. (1992). It is relative to this model that industry profit is computed. This profit is compared to the profit without emissions trading to give an estimate of the potential gains that can be realised by allowing for emissions trading. The model, which is applied to data for the Swedish pulp and paper industry, suggests that this industry would have had up to 6% (1%) higher profits in 1989 (1990) if emissions trading had been used instead of individual permits to achieve the same total emissions target. Currently there is no permit trading in this industry so our results only model the potential gains that can be made.     

Trade-offs in sulfur emission trading in Europe

How to implement emission trading is one question in the current negotiations on a new sulfur protocol in Europe. Whereas the current protocol stipulates a 30 percent uniform reduction, national emission ceilings included in the proposed new protocol imply differentiated reductions. In addition, emission and fuel standards are proposed. This paper examines the costs and environmental impacts of emission trading. Emission trading combined with regulations is a new element in the paper. Calculations using the RAINS (Regional Acidification INformation and Simulation) model suggest that overlaying emission trading on regulations not only reduces the cost savings but has beneficial impacts as well: ecosystem protection is not changed and significant decreases in environmental benefits for countries are largely avoided. Emission trading can also be used to decrease emissions and increase ecosystem protection. If combined with existing legislation, emission trading minimizes losses in expected environmental benefits for some countries, and most countries gain. However, the initial distribution of emission ceilings has to be used so that some countries are not confronted with higher costs. Trade-offs appear to exist between the use of emission trading to achieve cost savings on the one hand, and ecosystem protection and distributional equity on the other.     

Emission trading in Europe with an exchange rate

This paper explores the analytical and empirical properties of a new method for emission trading according to a fixed exchange rate. The exchange rate is based on the ratios of the marginal costs of abatement in the optimal solution in order to account for the impact of the location of emission sources on the deposition. It is shown that, generally, this system will not achieve the optimal solution and does not guarantee that environmental deposition constraints are not violated, although total abatement costs are always reduced. A routine was developed to mimic trading as a bilateral, sequential process, subject to an exchange rate. In the example used, results for SO₂ emissions in Europe show that, starting from a uniform reduction, exchange-rate trading achieves higher cost savings than one-to-one trading, without achieving the cost minimum. Sulfur deposition targets are not violated since the initial emission allocation overfulfilled targets at many places. The results are sensitive to: pre-trade emission levels, the transaction costs, the availability of information on potential cost savings and assumptions made on the behavior of trading partners.     

Markets,Morality and Climate Change: What,if Anything,is Wrong with Emissions Trading?

This article explores whether emissions trading is morally defensible To do so it examines three different kinds of moral consideration Which might be used to judge emissions trading. The first kind makes what I term an ‘ethical’ objection, and holds that utilising market instruments to combat climate change is inherently objectionable. I examine three versions if this ‘ethical’ argument but find none persuasive. The remainder of the article considers two additional moral considerations, both of which appeal to principles of justice. Drawing on these it argues that emissions trading can be morally defensible but only it it meets these two demanding moral criteria. First, the costs of emissions trading should be shared equitably. The paper examines what this might mean and criticises the leading account of what constitutes a just distribution of emissions Second, emissions trading must make an appropriate contribution to climate mitigation. A number of ways in which current emissions trading schemes signally fail to meet this second criterion are then noted. The article concludes that emissions trading schemes could in principle be morally defensible but only if new schemes are introduced or existing schemes are radically redesigned in line with the principles outlined in the article.     

Water quality trading with asymmetric information,uncertainty and transaction costs: A stochastic agent-based simulation

We examine the efficiency of emissions trading in bilateral and clearinghouse markets with heterogeneous, boundedly rational agents making decisions under imperfect and asymmetric information, and transaction costs. Results are derived using a stochastic agent-based simulation model of agents’ decision-making and interactions. Trading rules, market structures, and agent information structures are selected to represent emerging water quality trading programs. The analysis is designed to provide a strong test of the efficiency of trading occurring through the two market structures. The Differential Evolution algorithm is used to search for market trade strategies that perform well under multiple states of the world. Our findings suggest that trading under both bilateral and clearinghouse markets yields cost savings relatively to no trading. The clearinghouse is found to be more efficient than bilateral negotiations in coordinating point–nonpoint trading under uncertainty and transaction costs. However, the market under both structures is unlikely to achieve or even approximate least-cost pollution control allocations. Expectations of gains from water quality trading should, therefore, be tempered.     

污染物减排政策效果比较——基于经济学视角

我国政府已经把减少污染物排放作为约束性指标纳入到国家中长期发展战略之中,采取有效的污染物减排政策是中国缓解环境压力、实现经济社会可持续发展的重要手段.排污权交易制度是在总量管制的情况下,通过污染物排放权的分配,最终实现该区域总的排污量削减.本文从经济学的视角,研究了排污权交易的实施基础,并与行政强制性减排以及环境税减排进行了效率比较,结果表明排污权交易比单纯的行政强制性排污和环境税约束具有更高的市场效率以及灵活性,同时并不会降低整个社会的污染物排放效果.此外,从市场势力的影响、市场信息的影响、交易规则的影响等方面讨论了影响排污权交易市场效率的因素,对我国排污权交易市场的发展提出了相应的建议,为排污权交易市场的稳定运行提供了理论参考.     

Who Wins from Emissions Trading? Evidence from California

Researchers and environmental policy advocates have raised questions regarding the distributional impacts of emissions trading programs, a.k.a. “cap-and-trade”. While previous research has been careful to identify the causal effect of emissions trading on emissions reductions (Fowlie et al. in Am Econ Rev 102(2):965–993, 2012, hereafter FHM), we argue that existing estimates of differential impacts on demographic groups have relied on unrealistic assumptions regarding pollution dispersion. In this paper, we estimate the emissions reduction due to the RECLAIM cap-and-trade program in Southern California following the identification strategy of FHM, but we relax the assumption of uniform dispersion surrounding point sources. We model the transport of effluents using a state-of-the-science dispersion model to determine the areas impacted by emissions from each source. Importantly, conditional on race and ethnicity, we find that higher income areas receive larger reductions in pollution under cap-and-trade. Furthermore, conditional on income (or poverty rates), we find that Blacks benefit while Hispanics lose relative to whites under RECLAIM.     

Construction of legal system of carbon emissions trading in China

Countries in the world have taken a variety of means to control carbon emissions based on the serious situation of global warming,the concept of low-carbon economy and the provisions about emissions in the United Nations Framework Convention on Climate Change（UNFCCC） and the Kyoto Protocol.With the measures of emissions reductions,the system of carbon emissions trading is taking shape.It is necessary for China as the big natural resources consumption country to establish its own carbon emissions trading system.By introducing the carbon emissions trading system of the European Union,America and Japan,and analyzing the market and policies been formed,the carbon emissions trading system in China can be established from the initial configuration of the emissions rights,the subject and object of carbon emissions trading,establishing the carbon emissions trading exchange and supervising and regulating the carbon emissions trading.     

Accounting for retiree medical liabilities--considerations for selecting financial assumptions

The Financial Accounting Standards Board proposed statement on employer's accounting for postretirement benefits other than pensions closely parallels the Board's pension accounting rules. Mr. Amoroso explains the calculations and financial assumptions involved.