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Hybrid emissions trading systems: what about efficiency?

Hybrid emissions trading systems: what about efficiency?. Dr. Stefan Weishaar, M.Sc., LL.M. Associate Professor of Law and Economics Faculty of Law, Department of Law and Economics Groningen Centre of Energy Law. Carbon Ambition:. Intensity targets

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Hybrid emissions trading systems: what about efficiency?

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  1. Hybrid emissions trading systems: what about efficiency? • Dr. Stefan Weishaar, M.Sc., LL.M. • Associate Professor of Law and Economics • Faculty of Law, Department of Law and Economics • Groningen Centre of Energy Law

  2. Carbon Ambition: • Intensity targets • - 17% carbon intensity below 2005 levels by 2015 • - 40 -45% carbon intensity below 2005 levels by 2020 • => Moving target • GDP growth? • Economic transition?

  3. Instruments: • Command and control • Natural limits • Market based • Setting Q: ETS • Setting P: Tax • For the NDRC (Energy Research Institute) ETS and Tax are NOT mutually exclusive!

  4. Taxes: targeting P • Price signal => innovation => abatement • Tax Revenue • Adjustable by law • Not protecting incumbents • Emissions vary • Optimal tax rate requires optimal information • Effectiveness depends heavily on demand and supply functions (price should be elastic to induce change) • Flat tax vs. Pigou

  5. ETS: targeting Q • Trade => lowest abatement costs • Adapt to inflation • Automatic stabilizer • Politically feasible (permits; taxes) • Common and differenciated responsibility • Price volatility=> investment uncertainty => limited innovation • Optimal Q requires optimal information • Windfall profits • Leakage (offsets)

  6. L & E insights • ETS: high admin. Costs for small installations • Tax: falt tax easily applied but suboptimal • => ETS for large, Tax for small installations

  7. Policy goals • Primary goal: Carbon intensity per unit of GDP • Equal?: Carbon limitation & investment/innovation • Dynamic caps (Guangdong?) • Continuous price signal • Could a Carbon Tax + ETS combination offer a solution? • Base price signal => innovation • (Dynamic) cap

  8. Hybrids + efficiency? Dr. Jiang Kejun, Director of the Energy Research Institute of the NDRC “Carbon tax and an ETS are not mutually exclusive” • => Inefficiencies: • Distortions of competition • ETS covered installations pay more • Double payment for emissions? • Distortions of the abatement market • Higher administrative costs than one scheme

  9. Other options: • Price corridors (ETS with a price floor and ceiling) • Govt. buys allowances back / prints allowances • McKibbin and Wilcoxen (2002) • Significant efficiency improvements, Pizer (2002) • Easy linking, PWC (2009) • China + financial commitment?

  10. A solution for China? • Substantial auctioning with a reserve price allows government to guide secondary market prices • (Dynamic) cap can be safeguarded • Price declines are short lived • Positive allowance price=> investment incentives • Centralization (?)

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