Public Policy: Using Market-Based Approaches - Department for ...

More documents

Recommendations

Info

Public Policy: Using Market-Based Approaches Market power problems are less likely if permits are sold in an auction rather than grandfathered. Even if permits are allocated through an auction, however, market power problems can still arise. For example, one firm might outbid others in order to obtain enough permits to monopolise its product market. This outcome can be avoided if safeguards are included in the allocation process, which might involve limits on the proportion of permits that can be allocated to any individual firm. This problem is also less likely to occur where the scheme involves participants across several industries (and hence economic markets) so that new entrants to one market can purchase permits from firms operating in other markets. Second, firms may hoard permits in order to manipulate the market for the permits themselves. Economic theory suggests that it may be rational for firms to attempt to corner the market in this way. As with issues of liquidity, this risk can be reduced by maximising the size of scheme across emission types and geographic boundaries. CONCLUSION Marketable permits can allow government to limit the level of a negative externality to a socially desirable level with lower costs and greater incentives for innovation than alternative methods of regulation. Our case study of the UK emissions trading scheme looks at how a system of marketable permits has been implemented in practice, the impact this has had on the cost efficiency with which emissions reductions have been achieved, and the extent to which the potential problems described above arose in practice and how they were dealt with. Taxes and subsidies Marketable permits are one method by which externalities can be corrected for. In the case of marketable permits, the government sets the total quantity allowed of the negative externality and then lets the market determine the price. An alternative method is for the government to set the price, and allow the market to determine the quantity. The government can set a per-unit tax in the case of a negative externality, 51 or a subsidy in the case of a positive externality. The aim is to change the market price to reflect social costs and benefits and so to encourage an optimal level of production. WHAT ARE THE BENEFITS OF THIS SYSTEM? The benefit of per-unit taxes and subsidies are that they may align private and social interests more closely so that users pay close to the ‘true’ cost. However, as we noted earlier, considerable information with regard to the right level of the tax is required. 51 Or a subsidy for reducing the externality. 62
Due to the negative externality, these taxes can provide a source of public revenue that is likely to be less distortionary than existing taxes. 52 In fact, Terkla estimates that revenues from an effluent fee charged on particulates and sulphur oxide emissions would provide substantial efficiency gains of up to $3.05 billion (in 1982 US dollars) if substituted for either federal individual income tax or corporation income tax. 53 APPLICATIONS Unit taxes in the form of effluent fees have been employed to regulate water quality and noise pollution in Europe. However, their goal has largely been to raise money to finance projects for water quality management rather than to regulate optimal effluent discharge. Evidence from the Netherlands, however, suggests that fees have had a measurable effect on reducing emissions. For example, Bressers (1983) and Brown and Bressers (1986) use econometric techniques to find that firms have responded to fees by cutting back significantly on discharges of water borne pollutants. 54 Although a command and control situation would also have reduced pollution, the benefit of the taxes and subsidy system is that the cost of the pollution is internalised and the market adjusts to find the optimum level of output. WHEN ARE TAXES PREFERABLE TO MARKETABLE PERMITS? Section 7 – Market-Based Mechanisms In a world of perfect information and certainty, tradable permits and taxes would have identical effects on emissions abatement and costs. 55 In the real world, however, uncertainties about costs and benefits can influence which approach is preferred. For instance, in cases where a small increase in the level of emissions could result in a large decrease in benefit a tradable permit approach may be preferred. In cases where the cost of achieving a given emissions level is uncertain the charge approach may be preferred. 56 52 Lee, D. and Misiolek, W. (1986) ‘Substituting Pollution Taxation for General Taxation: Some Implications for Efficiency in Pollution Taxation’, Journal of Environmental Economic Management 13(4). 53 Terkla, D. (1984) ‘The Efficiency Value of Effluent Tax Revenues’, Journal of Environmental Economic Management 11(2). 54 Bressers, H. (1983) ‘The Effectiveness of Dutch Water Quality Policy,’ Mimeo, The Netherlands: Twente University of Technology. Brown, G. and H. Bressers (1986) ‘Evidence Supporting Effluent Charges’, Mimeo. The Netherlands: Twente University of Technology. 55 Using taxes to address environmental externalities leads to an efficient level of pollution abatement, which can occurred at the lowest marginal cost. Baumol,W.J.(1972) ‘On taxation and the Control of Externalities’, American Economic Review 62 (3). 56 See for instance Stavins, R. (2001) ‘Lessons from the American Experiment with Market-based Environmental Policies’ RFF discussion paper 01-53: and Chairman of the Council of Economic Advisors (2000), Making Market Work for the Environment, Economic Report of the President, Chapter 7. USA 2000 63
Page 1 and 2:
DTI ECONOMICS PAPER NO.14 Public Po
Page 3 and 4:
DTI ECONOMICS PAPER NO.14 Public Po
Page 5 and 6:
Contents Acknowledgements vi Forewo
Page 7 and 8:
Contents Section 11 Emissions Tradi
Page 9:
Foreword There is increasing intere
Page 12 and 13:
SECTION 1 Introduction and summary
Page 14 and 15:
Public Policy: Using Market-Based A
Page 16 and 17:
Page 18 and 19:
Page 20 and 21: Public Policy: Using Market-Based A
Page 22 and 23: SECTION 2 Using market mechanisms U
Page 30 and 31: SECTION 3 Lessons for the design an
Page 40 and 41: SECTION 4 Introduction This part of
Page 50 and 51: SECTION 7 Market-Based Mechanisms W
Page 78 and 79: SECTION 8 Framework for assessing m
Page 81 and 82: Part IV Case Studies 73
Page 83 and 84: ● the Green and White papers behi
Page 85 and 86: A prison failing to deliver on its
Page 87 and 88: Table 9.3 Companies providing priso
Page 89 and 90: Section 9 - Competitive Tendering o
Page 91 and 92: detect any deviation from a collusi
Page 93 and 94: at HMPS began as an equal mix of th
Page 95 and 96: (e.g. lighting). This impact could
Page 97 and 98: MARKET POWER The full benefits of c
Page 99 and 100: However, it should be noted that te
Page 101 and 102: on competition is uncertain. The ab
Page 103 and 104: Controlling for problems of asymmet
Page 105 and 106: Procurement process design One way
Page 107 and 108: however, financial deductions are m
Page 111 and 112: The Independent Monitoring Board at
Page 113 and 114: Figure 9.1: Difference between the
Page 115 and 116: ‘While there were staff in the pu
Page 117 and 118: design the invitation to tender and
Page 121 and 122:
and demand conditions. Second, we d
Page 123 and 124:
DEMAND Anyone can apply to a local
Page 125 and 126:
● Rent deposit guarantee by the l
Page 127 and 128:
The Green Paper stated the Governme
Page 129 and 130:
It was not an objective of ODPM or
Page 131 and 132:
DESCRIPTION OF MARKET MECHANISM The
Page 133 and 134:
Once the outcome is determined, fee
Page 135 and 136:
DEVELOPMENTS OVER TIME The major mo
Page 137 and 138:
Concerns about capacity constraints
Page 139 and 140:
from those already located within t
Page 141 and 142:
In several areas, registrations by
Page 143 and 144:
Controlling for information problem
Page 145 and 146:
extent though, it was competition b
Page 147 and 148:
Section 10 - Choice-Based Letting i
Page 149 and 150:
levels are reducing and new tenants
Page 151 and 152:
desired effect of limiting points-c
Page 153 and 154:
efficiency savings in some areas. T
Page 155 and 156:
SECTION 11 Emissions Trading Introd
Page 157 and 158:
Section 11 - Emissions Trading coex
Page 159 and 160:
Section 11 - Emissions Trading emis
Page 161 and 162:
A more detailed and diagrammatic de
Page 163 and 164:
The costs of monitoring and reporti
Page 165 and 166:
INITIAL ALLOCATION OF PROPERTY RIGH
Page 167 and 168:
only 242 in the second year. The di
Page 169 and 170:
COST-EFFICIENT EMISSIONS REDUCTIONS
Page 171 and 172:
consultants to Defra of £11 per to
Page 173 and 174:
Participation has helped us to rais
Page 175:
Section 11 - Emissions Trading emis
Page 178 and 179:
SECTION 12 Issues in the implementa
Page 180 and 181:
Page 182 and 183:
Page 184 and 185:
Page 186 and 187:
Page 188 and 189:
Page 190 and 191:
Page 192 and 193:
Page 194 and 195:
Page 196 and 197:
Page 198 and 199:
Page 200 and 201:
Page 202 and 203:
Page 204 and 205:
Page 206 and 207:
Page 208 and 209:
Page 212:
Printed in the UK on recycled paper
show all

Public Policy: Using Market-Based Approaches - Department for ...

Create successful ePaper yourself

Delete template?

Save as template?