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Early Emission Reduction Programs: An Application to CO2 Policy

Ian W.H. Parry and Michael Toman

Year: 2002
Volume: Volume23
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No1-4
View Abstract

In the wake of the 1997 Kyoto Protocol, which if implemented would oblige industrialized countries to meet targets for greenhouse gases (GHGs) In 2008-2012, there have been several proposals to reduce emissions during the interim period. A concern for early reduction also arises in other policy contexts. This paper uses a series of simple models and numerical illustrations to analyze voluntary early reduction credits for GHGs. We examine several issues that affect the economic performance of these policies, including asymmetric information, learning-by-doing, and fiscal impacts, and we compare their performance with that of an early cap-and-trade program. We find that the economic benefits of early credit programs are likely to be limited, unless these credits can be banked to offset future emissions. Such banking was not allowed under the Kyoto Protocol. An early cap-and-trade program can avoid many of the problems of early credits, provided it does not require excessive abatement.

Issues in Designing U.S. Climate Change Policy

Joseph E. Aldy and William A. Pizer

Year: 2009
Volume: Volume 30
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No3-9
View Abstract

Over the coming decades, the cost of U.S. climate change policy likely will be comparable to the total cost of all existing environmental regulation�perhaps 1-2 percent of national income. In order to avoid higher costs, policy efforts should create incentives for firms and individuals to pursue the cheapest climate change mitigation options over time, among all sectors, across national borders, and in the face of significant uncertainty. Well-designed national greenhouse gas mitigation policies can serve as the foundation for global efforts and as an example for emerging and developing countries. We present six key policy design issues that will determine the costs, cost-effectiveness, and distributional impacts of domestic climate policy: program scope, cost containment, offsets, revenues and allowance allocation, competitiveness, and R&D policy. We synthesize the literature on these design features, review the implications for the ongoing policy debate, and identify outstanding research questions that can inform policy development.

Emissions Trading in Forward and Spot Markets for Electricity

Makoto Tanaka and Yihsu Chen

Year: 2012
Volume: Volume 33
Number: Number 2
DOI: 10.5547/01956574.33.2.9
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Tradable allowances have received considerable attention in recent years. One emerging issue is their interaction with electricity markets. This paper extends the model of Allaz and Vila (1993) by incorporating emissions trading with forward and spot markets for electricity. We focus on the effects of strategic forward position and initial allowances allocation on the equilibrium outcomes. We find that firms with a dirty portfolio would have stronger incentives to take a long position in the forward market to raise the electricity price. Increasing the amount of allowances assigned to clean firms leads to a reduction in electricity and allowance prices. Keywords: Cap-and-Trade, Market Power, Forward Contract

New Entrant and Closure Provisions: How do they Distort?

A. Denny Ellerman

Year: 2008
Volume: Volume 29
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-NoSI-5
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Provisions to endow new entrants with free allowances and to require closed facilities to forfeit allowance endowments are ubiquitous in the EU Emissions Trading Scheme, but a new design feature in cap-and-trade systems. This essay seeks to explore, within a comparative statics framework, the effect of these provisions on agent behavior in output and emissions markets assuming profit maximization. The main conclusion is that the principal effect is on capacity. The effect of the resulting over-capacity on output markets is to reduce output price and to increase output. The effect on emissions markets is more ambiguous in that it depends on the emission characteristics of the new capacity, existing capacity, and the capacity not retired, and the distribution of the excess capacity among these categories.

Leakage from sub-national climate policy: The case of California’s cap–and–trade program

Justin Caron, Sebastian Rausch, and Niven Winchester

Year: 2015
Volume: Volume 36
Number: Number 2
DOI: 10.5547/01956574.36.2.8
View Abstract

With federal policies to curb carbon emissions stagnating in the U.S., California is taking action alone. Sub-national policies can lead to high rates of emissions leakage to other regions as state-level economies are closely connected, including integration of electricity markets. Using a calibrated general equilibrium model, we estimate that California's cap-and-trade program without restrictions on imported electricity increases out-of-state emissions by 45% of the domestic reduction. When imported electricity is included in the cap and "resource shuffling" is banned, as set out in California's legislation, emissions reductions in electricity exporting states partially offset leakage elsewhere and overall leakage is 9%.

National Climate Policies and Corporate Internal Carbon Pricing

Nuno Bento, Gianfranco Gianfrate, and Joseph E. Aldy

Year: 2021
Volume: Volume 42
Number: Number 5
DOI: 10.5547/01956574.42.5.nben
View Abstract

While national governments pledged to reduce their greenhouse gas emissions under the Paris Agreement, delivering on these aims will require significant changes in the activities of major sources of emissions such as companies. To drive such changes, companies will need to consider carbon emissions as a cost of production and many companies have begun doing so through internal carbon pricing. By employing data from the Carbon Disclosure Project, we evaluate how national carbon pricing policies influence firm-level internal carbon pricing and corporate emission targets. We find that firm-level internal carbon prices are significantly higher in countries explicitly pricing carbon through tax and/or cap-and-trade programs. These findings shed light on how companies are factoring climate change in their decision-making and on the drivers that can contribute to the generalization of climate pricing in the economy.

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