Emission Trading Program Research Articles

Effectiveness of Environmental Law: What Does the Evidence Tell Us?

A lot of literature has paid attention to ways in which the performance of environmental law could theoretically be improved. Less attention is, however, paid to the question which environmental policy instruments have actually led to a reduction of environmental harm. The problem is not that this material is not available. Since the early use of environmental policy instruments in the 1960s and 1970s various environmental and social scientists have analyzed the effects of particular environmental policy instruments. However, since these results are often published in environmental economics journals, they have to a large extent not led to a large influence in the environmental legal community. Moreover, to the extent the empirical literature is known, it often focuses on one particular aspect, e.g. the effects of an emission trading programme. The enclosed paper tries to fill that gap by looking at the empirical literature with respect to environmental policy instruments in an integrated manner. A large amount of these empirical studies are discussed in a critical manner whereby the various environmental policy instruments (liability rules, regulation, but also market-based instruments such as taxation and emission trading) are discussed in an integrated way. This overview does shed some light on the circumstances under which particular policy instruments (or a combination of instruments) may be effective in reducing environmental pollution. Attention is also specifically paid to the crucial issue of the enforcement of environmental law, thus discussing sanctioning policy and various enforcement strategies. The paper on the one hand brings together a lot of the widely-spread empirical literature with respect to the effectiveness of environmental law; on the other hand it also calls on environmental lawyers to increasingly use this type of empirical literature in environmental policy evaluations. The relevance of the paper is thus both theoretical as well as practical. From a theoretical perspective the paper tests particular assumptions made in environmental policy literature on how environmental law would work, by showing that the results in practice may often be different than what is assumed in theoretical literature. Theoretical literature for example points at the advantage of strict liability in deterring environmental pollution; empirical evidence, however, shows that increasing (strict) liabilities upon polluters also lead to liability avoidance behavior e.g. by organizing hazardous activities within smaller legal entities. This also shows the practical relevance of the paper. By showing under what circumstances particular policy instruments may work, important lessons are provided to the policy maker who e.g. would wish to move to the introduction of an emission trading scheme. The empirical evidence sheds important light on the conditions under which such a scheme can be able to reach the environmental goals desired by the legislator. The empirical evidence which is critically reviewed in this paper moreover relates to the application of environmental law in the US, Europe and developing countries and should therefore be of interest to a broad audience interested in the effectiveness of environmental law.

Impacts of alternative allowance allocation methods under a cap-and-trade program in power sector

Emission trading is considered to be a cost-effective environmental economic instrument for pollution control. However, the policy design of an emission trading program has a decisive impact on its performance. Allowance allocation is one of the most important policy design issues in emission trading, not only for equity but also for policy performance. In this research, an artificial market for sulfur dioxide (SO2) emission trading was constructed by applying an agent-based model. The performance of the Jiangsu SO2 emission trading market was examined under different allowance allocation methods and transaction costs. The results showed that the market efficiency of emission trading would be affected by the allocation methods when the transaction costs are positive. The auction allowance allocation method was more efficient and had the lowest total emission control costs than the other three allocation methods examined. However, the use of this method will require that power plants pay for all of their allowance, and doing so will increase the production costs of power plants. On the other hand, output-based allowance allocation is the second best method.

Prices versus quantities versus bankable quantities

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm's perspective and a limit on negative bank values (e.g. borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.

Prices versus Quantities versus Bankable Quantities

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm's perspective and a limit on negative bank values (e.g., borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.

The effect of emission permit trading with banking on firm's production–inventory strategies

Abstract We investigate the effect of tradable emission permits with banking on the production–inventory strategy of a firm in this paper. The basis of the work is the well-known Arrow–Karlin dynamic production–inventory model, in which the inventory holding costs are linear, and production costs are non-decreasing and convex functions of the production level. The cost of environmental protection is taken into account in the model. We assume there is an emission trading program, with which firms are able to purchase their emission rights or sell them, and the rights are allowed to be deposited in intertemporal trading. We compare the optimal production–inventory strategies of this paper with those without emission permits.

Can Affirmative Motivations Improve Compliance in Emissions Trading Programs?

Early emissions trading programs have obtained a very high rate of compliance, in part by using continuous emissions monitors (CEMs) that automatically record emissions data on a 24‐hour basis. As they expand into a wider range of pollutants and sources, however, such policies will have to rely on less automated forms of self‐reporting. This article asks if improved “affirmative motivations” for compliance based on perceptions of a policy's fairness could reduce the likelihood of underreporting, thereby lowering verification costs without unduly jeopardizing environmental integrity. Using a computerized laboratory emissions trading market, we find that many subjects reported emissions honestly in situations where dishonest reporting would have been more profitable, as well as a statistically significant association of affirmative motivations based on perceptions of a policy's fairness with honest reporting. These results suggest that designing an emissions trading program to increase its perceived fairness among users has the potential to increase honest emissions reporting and reduce monitoring costs.

Emission trading applications in the European Union and the case of Turkey as an emerging market

PurposeThe purpose of this paper is to analyze emission trading applications in the European Union (EU) and to benefit from its experiences; also to discuss different types of energy financing mechanisms for Turkey, an emerging market which faces a fast growth of energy demand.Design/methodology/approachThe Kyoto Protocol and its market‐based flexible mechanisms to reduce emissions worldwide are explained. The logic and development phases of an emission trading scheme (ETS) started in 2005 in the EU are given in response to this protocol's targets. With lessons learned from the ETS, the position of Turkey in terms of greenhouse gas emissions and its strategy to find solutions for a low carbon economy are underlined, as it can be assumed to be a reference point for other emerging markets.FindingsThis ETS became the main vehicle for EU member states to enforce themselves, to be in line with their Kyoto's emission reduction targets via some mechanisms and it has the potential to be leader in the formation of a global emission trading program. It made possible the transfer of technology and experience to emerging countries. Turkey should be aware and well prepared, for the post‐Kyoto period, to benefit from similar mechanisms to finance its energy investments.Practical implicationsThe paper is a useful source of information for ETS.Social implicationsThis paper gives information on emission reduction mechanisms used worldwide by countries which aim to be a low carbon economy.Originality/valueThis paper fulfils a resource need for the structure of ETS and the position of Turkey as an emerging market with Kyoto's Protocol.

Emissions Trading in Santiago, Chile: A Review of the Emission Offset Program of Supreme Decree No. 4

Santiago, Chile was subject to serious air quality problems in the late 1980s and early 1990s as a result of increased industrial and transportation emissions. In an effort to improve air quality, the government implemented a number of policies including an emission trading program to reduce and cap emissions of particulate matter smaller than 10 microns (PM10) from stationary sources. The emission trading program was viewed by many as a way to provide industry with flexibility to develop source-specific approaches to meet the reduction target at a lower cost and to reduce government administrative requirements.The environmental objective of the program, to reduce PM10 emissions from stationary sources by 50%, was met by 1998. However, some academics, industry groups, and government officials have questioned the efficiency and effectiveness of the program, citing obstacles such as frequent rule changes, a lengthy and uncertain transaction approval process, and lack of market activity, which discourage trading and do not allow industry to take full advantage of cost-saving opportunities provided by the emission trading program. As an environmental program, it should be judged first and foremost on its achievement of the environmental goal. Developing the market is secondary, but it can make achieving the environmental objective more cost effective.This paper reviews the program and highlights design alternatives for future emission trading programs in Santiago that may yield positive environmental benefits at lower cost.

On Emission Trading System

This article addresses the theoretical basis of emission trading, its implication, origin, basic content, procedure and its implementation basis. Then the author clarifies the advantages and disadvantages of emission trading as well as its countermeasure analysis. In the end, the article deals with the pilot project of Sino-America cooperating emission trading program and its assessment.

Contributors

Contributors

In This Issue

In This Issue

An experimental analysis of compliance in dynamic emissions markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.

국내 온실가스 감축의 조기행동 인정 방안

Enforcement Decree of the Framework Act on Low Carbon, Green Growth for achieving the country`s GHG emission reduction goal of 30% was in effect. The remarkable content of the Act is the managements of targets for GHG reduction. So, the entities that have reduced voluntarily have much interest in the recognition of `early action`. The recognition of early action is necessary to induce the fair competence of business entities and promote the voluntary GHG reduction. The definite and concrete guidance should be prepared. The important principles for this are the environmental integrity and the additionality. Based on this, the early action activities must be restricted to the voluntary, real, permanent, quantifiable, verifiable reduction. In the early action recognition, its credit should be allocated additionally set aside from the GHG target allocation in the national total allowance. Through this, the reward for the early reduction should be realized on market mechanism. The effective period to award the early action should be addressed. This can be the period after the enactment of framework on GHG reduction in effect and before the beginning year of GHG target control. It should be set with flexibility through the collection and consultation of the sector`s opinions. The appropriate allowance reserve of early action was estimated as approximately 1~1.5% by using the data from the `Pilot GHG Emission Trading Program` operated by Ministry of Environment. Also, the concrete and detail guidance to construct the necessary infra which is used to register the related information of early action activities should be prepared.

When renewable portfolio standards meet cap-and-trade regulations in the electricity sector: Market interactions, profits implications, and policy redundancy

Emission trading programs (C&T) and renewable portfolio standards (RPS) are two common tools used by policymakers to control GHG emissions in the energy and other energy-intensive sectors. Little is known, however, as to the policy implications resulting from these concurrent regulations, especially given that their underlying policy goals and regulatory schemes are distinct. This paper applies both an analytical model and a computational model to examine the short-run implications of market interactions and policy redundancy. The analytical model is used to generate contestable hypotheses, while the numerical model is applied to consider more realistic market conditions. We have two central findings. First, lowering the CO 2 C&T cap might penalize renewable units, and increasing the RPS level could sometimes benefit coal and oil and make natural gas units worse off. Second, making one policy more stringent would weaken the market incentive, which the other policy relies upon to attain its intended policy target.

An Experimental Analysis of Compliance in Dynamic Emissions Markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.

Emission trading: Participation enforcement determines the need for compliance enforcement

We identify and explain significant differences between the compliance enforcement systems of three cap-and-trade programmes: the European Union’s Emission Trading Scheme (EU-ETS), the US SO2emission trading programme and the Kyoto Protocol. Because EU-ETS’s compliance enforcement system is somewhat less potent than that of US SO2, but vastly more potent than Kyoto’s, it might be tempting to predict that EU-ETS will (1) not quite achieve the SO2programme’s near-perfect compliance rates, yet (2) achieve significantly better compliance rates than Kyoto. However, we offer a novel theoretical framework suggesting that how compliance enforcement affects compliance will depend on how the emission trading programme addresses participation. We conclude that while (1) will likely prove correct, (2) will not; Kyoto may even outperform EU-ETS compliance-wise because whereas EU-ETS (and US SO2) specify mandatory participation, most Kyoto member countries participate voluntarily.

China’s Total Emission Control Policy: A Critical Review

Abstract As part of a comprehensive environmental management system, many countries establish emission control targets for mass emissions of a pollutant. Such targets are often the key objective of an environmental policy, such as an emission trading program. In China, however, it is more than just an objective of one particular policy; it has become a concept that has influenced many national environmental policies and activities. The objective of this article is to review the implementation of the total emission control policy in the past 10 years and explore emerging issues in its implementation. The article has three sections: a summary of the implementation experience, issues with the design and implementation of the policy, and policy recommendations.

Application of Tradable Emission Permits in Europe

The purpose of this study is merely to review the cur-rent situation in the designing and implementation of the emission trading programs in Europe. Historical data show that although there is a series of shortcomings in their current functioning, employing such instruments for GHG reduction policy makingis strongly expected to be efficient and effective. The European Union Emission Trading Scheme (EU ETS), Clean Development Mechanism (CDM) and Joint Implementation (JI) are just a few examples of the ambitious EU initiative that heavily relies on such instruments. We dwell on their operations and achievements by far and all the content in this article is expected to convince the Chi-nese government and regional public authorities to take positive actions and attitudes in promoting these instruments.

Economic and Emissions Implications of Load-Based, Source-Based, and First-Seller Emissions Trading Programs Under California AB32

In response to Assembly Bill 32, the state of California considered three types of carbon emissions trading programs for the electric power sector: load-based, source-based, and first-seller. They differed in terms of their point of regulation and in whether in-state-to-out-of-state and out-of-state-to-in-state electricity sales are regulated. In this paper, we formulate a market equilibrium model for each of the three approaches, considering power markets, transmission limitations, and emissions trading, and making the simplifying assumption of pure bilateral markets. We analyze the properties of their solutions and show the equivalence of load-based, first-seller, and source-based approaches when in-state-to-out-of-state sales are regulated under the cap. A numeric example illustrates the emissions and economic implications of the models. In the simulated cases, “leakage” eliminates most of the emissions reductions that the regulations attempt to impose. Furthermore, “contract reshuffling” occurs to such an extent that all the apparent emissions reductions resulting from changes in sources of imported power are illusory. In reality, the three systems would not be equivalent because there will also be pool-type markets, and the three systems provide different incentives for participating in those markets. However, the equivalence results under our simplifying assumptions show that load-based trading has no inherent advantage compared to other systems in terms of costs to consumers, contrary to claims elsewhere.

Greenhouse Gas Emission Permit Trading with Different Uncertainties in Emission Sources

The paper considers high and differentiated uncertainties associated with greenhouse gas inventories in the context of compliance evaluation in an emission trading program. One common approach adopted in the literature is to discount tradable permits for uncertainty. Following this general idea, we derive exact rules for markets using such permits—we call them effective permits. First, permit allocation to each market participant is adjusted based on the inventory uncertainty and the acceptable risk of noncompliance. Second, original emission permits are recalculated into effective permits, reflecting individual inventory uncertainty and the risk of noncompliance as well. We then illustrate emission adjustments and effective permits to two trading schemes. Since the derived market rules assume nonstochastic distribution of uncertainty, we also discuss the choice of the risk level, which accounts for stochastic uncertainty distribution.