Quota Price Research Articles

Formal and informal quota enforcement

I study renewable resource use and compliance in a dynamic model with both informal and formal modes of enforcement. Agents obtain utility from both resource use and from behaving according to a norm of quota compliance. The users can exceed their quota at the risk of being detected and formally punished, but they also risk informal sanctions in the form of social disapproval and guilt. I find that when accounting for informal enforcement, there is an indirect effect of regulatory change in addition to the intended direct effect. When policy change, such as tougher enforcement, makes individuals more compliant, the norm of compliance is gradually strengthened, which in turn induces more compliant behavior. I study the implications of policy change on compliance level, quota prices, and the norm of compliance, and show how the properties of the punishment function have important implications for the outcome.

Rate of Return Requirement for Climate versus Petroleum Projects

Many socio-economic rates of returns for climate projects have been used in analysing the present value of the climate benefit. However, little attention has been devoted to profitability assessments based on commercial considerations. Economic valuation of climate projects, seen from the perspective of a commercial company, is the subject of this article. In particular, we examine the required rate of return for a project where the uncertainty in the CO2 quota price is the main market uncertainty. We complement the existing climate literature by examining the required rate of return of a climate project in a Capital Asset Pricing Model (CAPM) setting. We find that the CO2 quota price has slightly more systematic risk in the period calculated than the oil price, and estimate the nominal required rate of return for the value of CO2 reduction to be 7.3 percentage points.

Rate of Return Requirement for Climate versus Petroleum Projects

Many sosio-economic rates of returns for climate projects have been used in analysing the present value of the climate benefit. However, little attention has been devoted to profitability assessments based on commercial considerations. Economic valuation of climate projects, seen from the perspective of a commercial company, is the subject of this article. In particular, we examine the required rate of return for a project where the uncertainty in the CO2 quota price is the main market uncertainty. We complement the existing climate literature by examining the required rate of return of a climate project in a Capital Asset Pricing Model (CAPM) setting. We find that the CO2 quota price has slightly more systematic risk in the period calculated than the oil price, and estimate the nominal required rate of return for the value of CO2 reduction to be 7.3 percentage points.

Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets

We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is - whether it is 'clean' or 'dirty' - and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, the optimal initial quota allocation turns out to resemble a grandfathering regime: clean firms are allocated no quotas - dirty firms are allocated quotas for a part of their emissions. With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour.

Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets

We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is—whether it is ‘clean’ or ‘dirty’—and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, a grandfathering regime—where clean firms are allocated no quotas and dirty firms are allocated quotas for a part of their emissions—minimizes the impact on firm behavior relative to a risk-neutral benchmark.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour. Allowing for abatement does not change the qualitative nature of our results.

Modelling the economic and ecological impacts of the transition to individual transferable quotas in the multispecies US west coast groundfish trawl fleet

AbstractToft, J. E., Punt, A. E., and Little, L. R. 2011. Modelling the economic and ecological impacts of the transition to individual transferable quotas in the multispecies US west coast groundfish trawl fleet. – ICES Journal of Marine Science, 68: 1566–1579. There is a need to understand the potential impacts on ecosystems and economies from shifting fisheries management towards individual transferable quota (ITQ) programmes. Multispecies fisheries present the challenge of understanding spatial patterns in fisher behaviour as they strive to balance profitable target catches while avoiding species with low catch limits. A spatially explicit model of biological and fleet dynamics was constructed to evaluate how the limited-entry groundfish trawl fleet off the US west coast and selected groundfish species (targeted Dover sole, and overfished darkblotched rockfish) were affected by two approaches to management: trip limits and ITQs. The model includes regional populations for both species, provides biological and socio-economic outputs, and determines quota price endogenously when applied for ITQs. Under ITQ management, effort and the total landings of the overfished species, darkblotched rockfish, were lower, coastwide profits higher, and the centre of fishing activity shifted south to areas with lower landing rates of darkblotched rockfish. The framework presented holds promise for obtaining insight about how new, untested management alternatives affect coastal and marine resources and those who rely on them.

Combining bioenergy and CO2 capture from gas fired power plant

Abstract The energy needed for amine based CO 2 capture from a natural gas power plant can be provided in several ways, one possibility is to use steam from the low-pressure steam cycle at a reduction in the power plants efficiency. Alternatively an external energy plant dedicated to providing energy for the CO 2 capture can be built. The fuel used will be of interest since the CO 2 in the flue gas from this plant should and probably must be captured. Natural gas, coal and biomass can be used as fuel in the energy plant. The use of biomass is interesting because of carbon neutrality. Capture is hence not necessary, and this gives flexibility to the CO 2 capture plant. A concept combining a natural gas power plant and CO 2 capture where the energy needed is provided by an external energy plant based on biomass is investigated. An assumed location in Porsgrunn, Norway is used as a basis. The concept is compared to alternative solutions through estimations of capital and operating cost. A condition that is put on the estimations of the operational cost is that for every tonne of CO 2 released to the atmosphere, which is not bio based, a CO 2 quota must be bought, and for every tonne of bio based CO 2 captured the value of a CO 2 quota is rewarded. The concept proposed is found to be the most expensive alternative with the initial specified conditions. A sensitivity analysis is performed where different scenarios for the following are varied, CO 2 quota price, natural gas price and biomass price. Scenarios that include an increased CO 2 quota price favor the proposed concept.

THE IMPACT OF SUBSIDY MECHANISMS ON BIOMASS AND OIL SHALE BASED ELECTRICITY COST PRICES

This paper provides electricity cost price estimates for biomass-based CHP plants and oil shale power plants to be constructed before 2013 and 2015 that can serve as references for more detailed case-specific studies. Calculation results give electricity costs prices under different CO2 quota price levels (for oil shale energetics), different combined heat and power (CHP) plant scales (for biomass energetics), with and without subsidy mechanisms. The impact of subsidy mechanisms on biomass and oil-shale energetics to adoption of biomass energy sources and its move toward grid parity as well as reasonability of available subsidy mechanisms to avoid backing of projects which cover of expenditure without subsidies are discussed.

Emissions Trading with Updated Allocation: Effects on Entry/Exit and Distribution

Allocation of emissions allowances may have significant distributional and efficiency effects. It is well known that cost-efficiency may be achieved if allowances are auctioned or distributed in a lump sum manner, e.g., based on emissions levels before the start of the system (‘grandfathering’). Bohringer and Lange (Eur Econ Rev 49:2041–2055, 2005) show that a cost-effective outcome can also be achieved if the base year for allocation is continually updated (‘updating’), given that banking and borrowing are prohibited. In this paper we examine whether updating alters the entry and exit conditions for firms compared to grandfathering, and how it affects profits for new and existing firms. We find that the two schemes function surprisingly similar: First, the incentives to entry and exit are identical. Second, the total value of free quotas to existing firms, based on emissions before the system starts, is also identical without any auctioning. With updating initial claims for free allowances have a shorter lifetime compared to grandfathering, but quota prices are higher as firms anticipate the effect of current emissions on future claims to free allowances. The two effects exactly cancel each other out. If there is some combination of auction and free allocation, the total value of free quotas will always be highest under grandfathering if the auction rate is the same. Entry and exit incentives are still equal.

Network analysis of a rock lobster quota lease market

Individual Transferable Quota (ITQ) management systems are typically introduced to promote better capital utilisation by the fishing fleet and other efficiency gains. ITQ management was introduced in the Tasmanian rock lobster industry in 1998 and led to a range of economic, social and cultural changes including an increasing proportion of the catch taken by fishers dependent on quota leasing. Quota owners who lease out their entire quota increasingly dominated ownership of the fishery. Temporal changes in lease quota trade networks and network characteristics were analysed, which showed that the lease quota trade network has become more integrated and the influence of personal connections less important. Change in the network structure of the market indicated that a smaller number of quota owners have become increasingly dominant in this market although there was no evidence that this had an effect on quota lease prices. Processors also participated in the lease quota market and influenced interactions and dependencies. In other jurisdictions processor relationships have been found to affect lease quota price developments. However, disproportionate quota ownership by processors and market manipulation did not occur here. This was due to a successful input control where quota ownership by one legal entity was capped. Because market control cannot be gained through investment in quota, another logical way of gaining it would be for processors to operate as pseudo brokers and distribute lease quota for quota owners. Although processors in Tasmania operate as pseudo brokers, the absence of structural changes in the processor market indicated that this produced no change in market power or quota owner loyalties.

Can Unilateral Trade Measures Significantly Reduce Leakage and Competitiveness Pressures on EU-ETS-Constrained Industries? The Case of China Export Taxes and VAT Rebates

The unilateral use of export restricting measures such as export taxes and VAT refund by China on energy-intensive sectors has raised both hopes and concerns over the last couple of years inside the EU. From a European perspective indeed, export restricting measures on products where China represents a decisive share of world production are likely to ease the competitive pressure faced by European import-competing industries, through both a quantity (import volumes decline) and price (world price rise) effect. Mirroring the border trade adjustment (BTA) scheme originally contemplated in the EU, trade restrictions on Chinese exports might hence have an effect on trade “comparable” to any border adjustment mechanism set in a large importing country. Concerns regard first the environmental motives if any of such export restraints, and second, provided that they are part of a national commitment to combat climate change, the exact amount to which these trade effects could be part of a deal by actually avoiding leakages outside the EU. Both concerns are addressed in this paper. We show that at least formally and legally, China’s export restraints on energy-intensive products are presented by Chinese officials as contributor to China’s overall environmental goals. The second concern we more lengthy dwell upon is to the extent to which EU import and China export adjustment mechanisms have comparable effects from a climate change perspective. Focusing on steel, aluminum and cement where risks of leakage are deemed plausible and export restricting measures have been raised in China during the last couple of years, we assess the comparability of China and EU commitment to combat climate change through a proxy given by the EU-ETS quota price equivalent of China’s export restrictions set on energy intensive products. After reviewing the rationale and current level of export taxes and VAT rebates on steel, aluminum and cement in China, we present the basic formula of EU-ETS quota price equivalent of China’s export restricting measures, and then apply it to steel, aluminum and cement. Our estimates of the EU-ETS quota price equivalent of Chinese exports restrictions provide figures of similar magnitude as the envisaged range of EU-ETS CO2 price, except for cement. We conclude by analysing the policy implications, and particularly, the leverage effects such export restraints could have in shaping a climate deal. Ongoing discussions with EU and Chinese officials triggered by IDDRI on this issue will provide first-hand material for such policy implications.

An agent-based model for simulating trading of multi-species fisheries quota

Individual transferable quotas (ITQs) are increasingly seen as a way to make fisheries more profitable and halt over-capitalisation. ITQs allocate to users of a resource a share of a total allowable catch (TAC) which they are free to use, lease, or sell. We outline an approach to modelling the effect of an ITQ system in a multi-species, multi-sector fishery and apply it to the Coral Reef Fin Fish Fishery (CRFFF) in Queensland, Australia. An ITQ model, based on the assumption that operators seek to maximize profits, simulates the use of tradeable quota units by operators in the fishery, taking account of the initial quota allocation to operators, seasonal fish prices and individual operator variable costs, their fishing efficiency and experience, and constraints on vessel movements. Rationalization of the fishery is predicted to occur under an ITQ system for the CRFFF, which will lead to reductions in effort, increases in profits, and changes over time in quota prices. The ecological consequences of transferable quota in the multi-species fishery are seen in the catch and discard levels of the less profitable species, even though a TAC was set. This had flow-on effects on biomass. For example, simulations showed that the TAC for the primary target species, coral trout, was used more fully than that for a less valuable target species, red throat emperor, and that this was achieved through increased discarding of red throat emperor. Catches of both coral trout and red throat emperor that were derived from the model were higher than those recently observed in the fishery. The effort predicted by the model, however, closely approximated the actual effort observed in the fishery following implementation of ITQ management.

Conflicting uses of marine resources: can ITQs promote an efficient solution?*

This paper examines the allocation problem arising from conflicting demands for marine resource use by (i) commercial fishers, (ii) recreational fishers, and (iii) conservationists. It is shown that decentralised trading of individual transferable quotas (ITQs) is capable of an efficient allocation of resource use between the first two parties. In contrast, it is found that the standard ITQ system is not capable of performing the same ideal co‐ordination between the conflicting interests of extractive users, that is, all fishers, and the non‐extractive ones, that is, conservationists. The reason is that quota trades between individual fishers and conservationists are inevitably accompanied by (positive) externalities on both other fishers and conservationists. As a result, decentralised quota trades between these parties cannot be efficient. The fundamental economic observation is that quotas for conservation and for extraction constitute two different goods. It follows that a socially optimal market allocation of these two goods requires two prices instead of the single quota price in the standard ITQ system. Thus, to achieve efficiency, the ITQ system has to be extended to incorporate both types of goods. It is shown in the paper that if fishers and conservationists can organise themselves into groups, trades of conservation quotas between the two groups can in principle lead to fully efficient allocation. An interesting implication of this modified ITQ system is that the need for a fisheries authority to set the total allowable catch (TACs) disappears.

Incentives and prices in an emissions trading scheme with updating

Emissions trading schemes where allocations are based on updated baseline emissions give firms less incentive to reduce emissions for a given quota (or allowance) price. Nevertheless, according to Böhringer and Lange [On the design of optimal grandfathering schemes for emission allowances, Europ. Econ. Rev. 49 (2005) 2041–2055], such allocation schemes are cost-effective if the system is closed and allocation rules are identical across firms. In this paper, we show that the cost-effective solution may be infeasible if marginal abatement costs grow too fast. Moreover, if a price cap or banking/borrowing is introduced, the abatement profile is no longer the same as in the case with an auction (or lump-sum allocation). In addition, we show that with allocation based on updated emissions, the quota price will always exceed marginal abatement costs, possibly misguiding policy makers and investors about abatement costs. Numerical simulations indicate that the quota price most likely will be several times higher than marginal abatement costs, unless a significant share of allowances is auctioned.

Factors Influencing Apparel Imports From China

This article examines the impact of the quota phase-out effect on apparel trade between the United States and China post-2005 quota eliminations. To achieve this goal, several critical variables associated with the U.S. import volume of apparel from China are identified and studied. These variables, including quota price, tariff rate, labor costs, and freight costs are analyzed to determine the extent to which they influence the import volumes. From the research results, the researchers postulate possible changes post-2005 in U.S. apparel imports from China and provide beneficial information to the U.S. retailing industry in terms of sourcing opportunity with China's apparel industries, pending possible safeguards through 2008. Implications of past utilization rates and quota limits for U.S. retailers' sourcing of Chinese apparel products are drawn. The research finds that quota prices and tariff rates most often significantly influence the trade pattern of the selected apparel groups and that quota removal boosts U.S. apparel imports from China.

ITQs under illegal fishing: An application to the red shrimp fishery in Chile

Abstract We study an individual transferable quota system with imperfect enforcement. We apply a model of individual fisherman behavior to the red shrimp (Pleuroncodes monodon) fishery in central-southern Chile. Simulation results suggest that illegal fishing could generate a 21% increase in fishing effort, resulting in a 13% increase in catch and a 2% lower quota price in comparison with the results of a system that operates under perfect compliance. The results are sensitive to changes in the level of fish abundance, total allowable catch, and the design of enforcement to induce compliance.

The end of textiles quotas: A case study of the impact on Bangladesh

This paper assesses the effects on the Bangladeshi economy of phasing out textile and clothing quotas by industrial countries. Bangladesh relies heavily on textile and clothing exports and is potentially very vulnerable to the abolition of the quotas. We used up-to-date information on quota prices for Bangladesh to evaluate its competitiveness in a quota-free world, and subsequently incorporate the quota price information in the GTAP model to simulate the effects of quota phase out on Bangladesh. We also examine in detail the supply constraints facing Bangladesh's textiles and clothing industries. Based on this analysis, we conclude that without accelerated structural reforms Bangladesh is likely to face significant pressure on its balance of payments, output and employment in the aftermath of quota removal.

Risk Attitudes and Individual Transferable Quotas

An analysis of ITQ fisheries management is offered in which two different groups of agents facing uncertain harvesting costs take part. The first group, termed as the coastal fleet, is risk averse, while the second group, interpreted as the ocean fleet, is risk neutral. In contradiction to what is seen in deterministic models of quota markets, given strongly decreasing absolute risk aversion amongst the coastal fleet members, it is found that the initial quota allocation affects the equilibrium quota price and the final catch distribution influencing the economic efficiency in the fishing industry.

On the Equivalence of Tariffs and Quotas under a Revenue Constraint

AbstractThis paper sets out a duopolistic model to examine the price and welfare equivalence of tariffs and quotas, given the quota rent is equal to the tariff revenue. It shows that the domestic welfare ranking of the two trade policies crucially depends on the relative costs of the domestic and foreign firms; when the domestic firm's relative costs are lower than those of the foreign firm, a quota regime generally leads to a higher welfare level than that of an equivalent tariff regime. This finding contrasts sharply with the conclusions of Dasgupta and Stiglitz (1977), where it was found that a tariff regime always generates higher domestic welfare.

Climate Policy under Technology Spillovers

We study climate policy when there are technology spillovers between countries, as there is no instrument that (directly) corrects for these externalities. Without an international climate agreement, the (non-cooperative) equilibrium depends on whether countries use tradable quotas or carbon taxes as their environmental policy instruments. All countries are better-off in the tax case than in the quota case. Two types of international climate agreements are then studied: One is a Kyoto type of agreement where each country is assigned a specific number of internationally tradable quotas. In the second type of agreement, a common carbon tax is used domestically in all countries. None of the cases satisfy the conditions for the social optimum. Even if the quota price is equal to the Pigovian level, R&D investments will be lower than what is socially optimal in the quota case. It is also argued that the quota agreement gives higher R&D expenditures and more abatement than the tax agreement.