Efficient Greenhouse Gas Emissions and Borrowing Systems I Will Gladly Pay You For

Transcription

1 Efficient Greenhouse Gas Emission Banking and Borrowing Systems I Will Gladly Pay you Tuesday for a GHG Permit Today Paul Leiby and Jonathan Rubin, July Leiby and Rubin 7/1/1998 1

2 Structure of Presentation Stock vs. Flow Pollutants Permit Trading and Banking Cooperative Emissions Abatement Implications for Banking Regime Design Numerical Estimates and Policy Implications Leiby and Rubin 7/1/1998 2

3 Stock and Flow Pollutants Flow Pollutants:» Damages nearly coincident with emissions» E.g.: Noise Stock Pollutants:» Accumulate and decay over time» Damages stem from accumulated stock» E.g.: CO 2 Difference often matter of degree. Leiby and Rubin 7/1/1998 3

4 Permit Trading Promotes Efficiency Established result for flow pollutant» Montgomery (1972) Literature on marketable permits» Market Power (Hahn 1984)» Enforcement (Malik 1992)» Regulated indust. (Coggins & Smith 1993)» Bilateral, sequential trading (Atkinson & Tietenberg 1991)» Optimality of incentives (Oates et al. 1989) Leiby and Rubin 7/1/1998 4

5 SO 2 Permits Actively Traded Source: U.S. EPA, Acid Rain Division's Home Page, Allowance Tracking System (ATS) Data ( 2/15/97 Leiby and Rubin 7/1/1998 5

6 New! Permit Banking Banking = Intertemporal Permit System Regulatory applications and examples» Acid rain program (banking )» CAFE credits (bank and borrow 3 years)» California tailpipe HC (bank)» Lead in gasoline (bank) Leiby and Rubin 7/1/1998 6

7 Banked SO 2 Permit Inventories Source: U.S. EPA, Acid Rain Division's Home Page, Allowance Tracking System (ATS) Data ( 2/26/97 Leiby and Rubin 7/1/1998 7

8 Permit Banking for Flow Pollutant Research on properties» Biglaiser et al (1995), Cronshaw & Cruse (1996), Rubin (1996) Kling and Rubin (1997) essential conclusion» Banking/borrowing not necess. efficient» Equalizes discounted marg control costs» Firms borrow given non-increasing costs (and non-decreasing standards) Leiby and Rubin 7/1/1998 8

9 For a Stock Pollutant, Banking Trickier Stock Pollutants = durable externalities Optimal Marginal Damages Likely to Vary Over Time Implications for Efficient Banking Regimes:» Unrestricted Trading Inefficient» Need modified banking/trading regime Leiby and Rubin 7/1/1998 9

10 Other Research on Banking Kruse and Cronshaw 1998 (theory and experiment) Toman and Palmer 1997 (accumulative pollutants) Leiby and Rubin 7/1/

11 Grand Application: GHG Emission Rights Trading envisioned under Kyoto Protocol US FCCC Draft Protocol Promoted Borrowing (State Dept 1997)» Emit more in 2000» Pay back with interest in 2010 or later Leiby and Rubin 7/1/

12 Global Cooperation Approach Key assumption: joint/cooperative objective function => Can seek global max» Useful for exploring potential coordination gains Alternative cooperative solution is Pareto Optimum, given individual objectives (e.g. Chichilnisky and Heal 1997, Nordhaus 1996) Leiby and Rubin 7/1/

13 Cooperative Objective Function J * e y max e... y N N T 0 δ (t) s.t: ( ) P (z)dz - C (y, e, t) - y(t) 0 y N i=1 S ( t) = e(t) - γs(t) yi(t) 0, ei(t) 0 e= e, y= y i i i i i i D(e,S,t) dt i - δ (T)F(S(T)) Max disc value of output minus control cost and damages Leiby and Rubin 7/1/

14 Cooperative Emissions Control Solution Stock and Flow Pollutant Case Eqn for opt abatement effort C a *: C * a * 1 dc a = D * 1 + D * ρ + γ dt e ρ + γ S C a = marginal abatement cost D e = marginal flow damage D S = marginal stock damage γ = stock decay rate ρ = discount rate dd dt * e Leiby and Rubin 7/1/

15 Cooperative Solution: Interpretation Current and future abatement costs balanced against current and NPV future damages Can solve differential equation for C a *: ( )( t ) ( )( T t ) C ( t ) = D ( t ) + e - r + g t - D ( ) d + e - r + g t t - F ( T ) a e T t Marg control costs = current marg flow damages + NPV future stock damages Leiby and Rubin 7/1/ S S

16 Establishing the Interest Rate on Bank Accounts Total # permits determines price level Banking/Borrowing determines permit price path For each agent, permit prices determine» Marginal abatement effort» Hence, emissions level To get efficient marginal abatement path: Set bank account interest rate Leiby and Rubin 7/1/

17 Stock-pollutant Only Case Efficient interest rate r e depends on marginal stock damages, marginal abatement costs, and stock decay rate r * e D * = S - C * a g r * e = T t D * S -( r + g )( t -t ) * -( r + g )( T -t ) e D ( t ) dt + e F ( T ) S S - g Leiby and Rubin 7/1/

18 Stock Pollutant - Summary Social Optimum C * a ( t) T = e t ( ρ + γ )( τ ( τ ) dτ + + γ )( T Private Optimum, with Trading t ) D * S e ( ρ t ) F S ( T ) C a ** = P e Market Outcome, with Banking dpe dt P e Pˆ = e i r (due to arbitrage) e Leiby and Rubin 7/1/

19 Numerical Values and Policy Implications Seek plausible numerical values US proposing to pay interest of 20%/decade Is this number high or low? Leiby and Rubin 7/1/

20 Falk & Mendelsohn Ests 5.00% Annual Growth Rate for Optimal Permit Prices Exog Growth for Damages, Emissions, Costs Percent 4.00% 3.00% 2.00% 1.00% 0.00% gd=2% ge=2% gc=-2% all Decade Leiby and Rubin 7/1/

21 F&M Implied Opt Banking Rates Percent 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Optimal Interest Rate on Permit Bank Accounts (Low Damage Scenario, 4% Discount Rate) Decade Damage Growth=2% Emssions Growth=2% Abate Cost Growth=-2% All None (base) Leiby and Rubin 7/1/

22 Borrowing and Technology Change Technological advances in emission abatement and damage mitigation, ceteris paribus, justify borrowing relative to a constant level of emissions reduction Leiby and Rubin 7/1/

23 Optimal Interest Rates on GHG Permit Bank Accounts Optimal Banking Interest Rates (Three Discount Rates) ρ=10% 8.00 Low Damages, Ge=0% Percent ρ=4% Low Damages, Ge=2% High Damages Ge=0% High Damages Ge=2% ρ=1% Year Leiby and Rubin 7/1/

24 Optimal Banking Interest Rates: Sensitivity Cases Optimal Interest Rates on GHG Permit Bank Account (4% Discount Rate) Ge=0% Gd=0% Ge=2% Gd=0% Ge=0% Gd=2% Ge=2% Gd=2% Low Damages High Damages Leiby and Rubin 7/1/ Year

25 General Insights on Banking Systems: I Yield private optimality conditions matching traditional trading systems Add restriction on time path of permit prices Leiby and Rubin 7/1/

26 General Insights on Banking Systems: II Unrestricted/free banking» Authority controls only one market outcome» Discounted permit price constant Specification of interest rate» Controls 2nd outcome, rate of price increase» Seek to match price path to damage path» Interest rate could be time-variant Leiby and Rubin 7/1/

27 Proposed Future Work Numerical Estimates With Climate Model Bargaining outcome, vs. cooperative Uncertainty:» regarding permit prices» regarding abatement costs Leiby and Rubin 7/1/