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Public Policy: Using Market-Based Approaches potential information issues. Research finds that patients are unsure of the value of performance measures and hospital rankings, leading researchers to conclude that patients need educating in order to interpret performance data properly. 219 The LGA study also notes that some data crucial to consumer choice, such as the atmosphere and cleanliness of the hospital or GP surgery, is unlikely to be collected in a way that allows for comparison. Marketable permits (‘Cap and Trade’) THE INITIAL ALLOCATION OF PROPERTY RIGHTS One of the main issues in a marketable-permits scheme is to determine the initial allocation of permits. A trading scheme can have important distributional consequences depending on how permits for a trading scheme are allocated. There are two main approaches to the distribution of emission allowances. These are: ● the auctioning of permits; and ● the allocation of permits to existing polluters, based on their historic levels of pollution. Auctions are likely to be superior to the allocation of permits without charge, in terms of economic efficiency. 220 However, we find that in most schemes permits are allocated based on historic data or targeted emissions. 221 Auctioned permits mean that polluters have to pay for the initial right to pollute. This approach is likely to result in higher costs for firms than under a scheme where they are given an initial allocation that they can then trade amongst themselves. The higher cost of this approach means that the initial effect on reducing pollution is likely to be higher. The resulting additional costs for participants can in principle be ameliorated by using the resulting revenues to reduce taxes, which can have the added benefit of reducing more distortionary taxes, such as taxes on incomes. If permits are allocated based on existing, or targeted, levels of emissions then, because firms do not pay for their initial permits, the initial cost to firms is likely to be lower. The initial reduction of pollution may be less than under a system of auctioning. However, at the margin, the incentives to reduce pollution should still be strong, since firms still face an opportunity cost from pollution: the value that could be realised by selling their permits. 222 219 See, for example, Magee, H., Davis, L-J and Coulter, A. (2003) ‘Public views on healthcare performance indicators and patient choice’, Journal of the Royal Society of Medicine, 96, 7, pp.338-342. 220 See Fullerton, D. and G. Metcalf (1997) ‘Environmental controls, Scarcity rents, and Pre-existing distortions’, NBER Working paper 6091. Goulder, L., I. Parry and D. Burtraw (1997), ‘ Revenue raising vs. Other Approaches to Environmental Protection: The Critical significance of Pre-existing price distortions’ Rand Journal of Economics, 221 See Stavins (2001) and UK ETS at http://www.Defra.gov.uk/environment/climatechange/trading/uk/ 222 See HM Treasury (2002) 188
LOCATION PROBLEMS Emissions trading typically takes place on a national or multinational basis. Each country or block is assigned a cap on how much pollution they can emit. This pollution target is based on an appropriate aggregate level. However, there may be localised problems of pollution if, even though the overall cap is met, all polluters locate in a particular geographic area. This may be a problem with some pollutants, such as emissions into rivers, which can cause local problems. This can be resolved, using regional caps. WILL A WELL-FUNCTIONING MARKET DEVELOP? Another consideration is whether the existence of a well-functioning market is likely to emerge, since in its absence very low trading would occur and thus the economic efficiencies associated with such a scheme are unlikely to be delivered. A well functioning market may require that various associated services are in place. These might include some form of organised exchange where permits can be traded. An organised exchange would normally involve brokers acting as agents for participants, providing them with access to the exchange, and the dissemination of information on prices so that participants can take informed decisions on whether to hold or sell their permits. Price transparency is important in signalling the cost of pollution to participants who can then use this information to take decisions on whether to reduce emissions or buy permits. To function well, the market in permits needs to be liquid, which means that it must be possible for participants to buy and sell permits relatively quickly without creating a significant impact on the market price. The market is likely to be more liquid the larger the number of potential participants trading permits. This can be achieved by allowing permits in different pollutants to be converted into the same ‘currency’ and traded on the same market. For example, the UK emissions trading scheme allows participants to convert permits between different types of greenhouse gas emissions at pre-specified values that represent their relative impact on climate change. MARKET POWER IN EMISSIONS TRADING Section 12 – Issues in the implementation of market mechanisms There are two types of market power that are usually identified in relation to emissions trading: 223 ● ‘exclusionary manipulation’, in which a firm holding a significant share of total tradable permits decides to hoard them in order to exclude other firms from its product market, which results in a distortion in competition for that product market; 224 or 223 See Burniaux, J.-M(1999) ‘How important is market power in achieving Kyoto? An assessment based on the GREEN model’ OECD paper. Economics Directorate, OECD, Paris. 224 See also Baron R (2000) ‘Market Power and Market Access in International GHG Emissions Trading’ Environment Directorate and International Energy Agency, OECD, Paris. 189
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DTI ECONOMICS PAPER NO.14 Public Po
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DTI ECONOMICS PAPER NO.14 Public Po
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Contents Acknowledgements vi Forewo
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Contents Section 11 Emissions Tradi
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Foreword There is increasing intere
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SECTION 1 Introduction and summary
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Public Policy: Using Market-Based A
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SECTION 2 Using market mechanisms U
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SECTION 3 Lessons for the design an
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SECTION 4 Introduction This part of
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SECTION 7 Market-Based Mechanisms W
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SECTION 8 Framework for assessing m
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Part IV Case Studies 73
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● the Green and White papers behi
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A prison failing to deliver on its
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Table 9.3 Companies providing priso
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Section 9 - Competitive Tendering o
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detect any deviation from a collusi
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at HMPS began as an equal mix of th
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(e.g. lighting). This impact could
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MARKET POWER The full benefits of c
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However, it should be noted that te
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on competition is uncertain. The ab
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Controlling for problems of asymmet
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Procurement process design One way
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however, financial deductions are m
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The Independent Monitoring Board at
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Figure 9.1: Difference between the
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‘While there were staff in the pu
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design the invitation to tender and
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and demand conditions. Second, we d
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DEMAND Anyone can apply to a local
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● Rent deposit guarantee by the l
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The Green Paper stated the Governme
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It was not an objective of ODPM or
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DESCRIPTION OF MARKET MECHANISM The
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Once the outcome is determined, fee
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DEVELOPMENTS OVER TIME The major mo
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Concerns about capacity constraints
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from those already located within t
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In several areas, registrations by
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Controlling for information problem
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