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Public Policy: Using Market-Based Approaches Marketable permit schemes share many features with environmental taxes. However, there are two main differences: 57 a. taxes fix the value assigned to pollution but leave the quantity undetermined, while trading schemes fix the quantity and leave the value to be determined by the market; and b. the distributional consequences can vary depending how permits for trading schemes are allocated. In cases where there is a choice between using a tax or tradable permit scheme, the choice between the two options will depend on the goal of the policy to be implemented and a cost-benefit analysis of each option. In other words and as stated by HM Treasury: 58 a. Is it essential to bring pollution down to a set quantity or is it the aim to internalise the known externality? In the former case a tradable permit scheme may be preferred, in the latter a per unit tax. b. What is the relationship between the marginal benefits of reducing emissions and the marginal cost of abatement? If this relationship is very uncertain, a tradable permit scheme may be preferred, as it allows the price to be determined by the market. A per unit tax could result in too great or too low a level of pollution abatement. c. Can a trading scheme be implemented at a reasonable cost and is there likely to be a well-functioning market in permits? If the answer is no, a marketable permits scheme is unlikely to given an optimal result. IMPLEMENTATION ISSUES Economic theory and studies of past experience suggest that the following implementation issues can affect the success of taxes and subsidies: ● existing market failures; ● measurement of emissions; ● determining the appropriate tax rate; and ● problems specific to subsidies The evidence on these issues which we have examined is set out in Part V. Below we summarise the main conclusions we have drawn from this evidence. 57 Cabinet Office (2002), The Energy Review, available at http://www.number-10.gov.uk/su/energy/TheEnergyReview.PDF. 58 HM Treasury (November 2002) Tax and the environment: using economic instruments, available at: http://www.hm-treasury.gov.uk/media/D54/07/adtaxenviron02-332kb.pdf. 64
Existing market failures If an existing market failure, in addition to the externality, exists, the use of a tax may fail to maximise social welfare. For example, in an industry with a monopoly supplier we would expect (everything else being equal) output to already be lower than the socially optimal level. Where we have both a pollution externality and monopoly power it will not be clear whether existing output is above or below the socially optimal level. In the latter case a pollution tax would reduce output further below the socially optimal level. In the presence of market power it may therefore be appropriate to have a lower tax, or no tax at all. Measuring emissions Where a tax is used to control pollution it will be necessary to accurately measure emissions. Where measurement is not feasible it may be possible to use a proxy measure, such as an input associated with the relevant pollutant – coal could be used as a proxy for SO 2 emissions, for example. The use of such proxies can reduce measurement and enforcement costs, but can also reduce the efficiency of the tax. The tax might fail to provide incentives to use technologies which reduces the level of emissions per unit of input, for example. The appropriate tax rate Calculating an appropriate tax rate would in theory require accurate information on the marginal cost to society of the externality that is taxed. In practice this information is unlikely to be known, which may suggest that a marketablepermit system might be more appropriate. Where a tax is used it will be necessary to adjust its level form time to time to reflect the effects of inflation and economic growth – a process which occurs automatically through changes in market prices under a marketable-permit scheme. Subsidies Subsidies raise many of the same issues as taxes. In addition, where a subsidy is used to reward reductions in a negative externality by increasing the quantity consumed of a substitute good (reductions in pollution, for example) there is a risk that the subsidy will encourage new entry into the industry, thereby increasing the overall level of the externality. For this reason, a tax is likely to be more effective at reducing a negative externality. CONCLUSION Section 7 – Market-Based Mechanisms Taxes and subsidies can be a more efficient means of achieving a desired level of externality than direct regulation. They may be preferable to a marketable permit scheme where uncertainty surrounding the cost of externality reduction means that setting the wrong quantity of permits could have significant and undesirable economic impacts. However, they can also drive the economy further from the socially optimal outcome when other market failures are 65
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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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Page 22 and 23: SECTION 2 Using market mechanisms U
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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
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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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extent though, it was competition b
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Section 10 - Choice-Based Letting i
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levels are reducing and new tenants
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desired effect of limiting points-c
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efficiency savings in some areas. T
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SECTION 11 Emissions Trading Introd
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Section 11 - Emissions Trading coex
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Section 11 - Emissions Trading emis
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A more detailed and diagrammatic de
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The costs of monitoring and reporti
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INITIAL ALLOCATION OF PROPERTY RIGH
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only 242 in the second year. The di
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COST-EFFICIENT EMISSIONS REDUCTIONS
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consultants to Defra of £11 per to
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Participation has helped us to rais
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Section 11 - Emissions Trading emis
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SECTION 12 Issues in the implementa
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