The Economics of Climate Change C 175 Christian Traeger Part 3: Policy Instruments continued. Standards and Taxes

Transcription

1 The Economics of Climate Change C 75 The Economics of Climate Change C 75 Christian Traeger Part 3: Policy Instrments contined Standards and Taxes Lectre 0 Read: Parry, I.W.H. & W.A. Pier (007), Emissions Trading erss CO Taxes, Resorces for the Ftre. 3 Instrments 8

2 The Economics of Climate Change C 75 Command and control (Standards) Past enironmental policy largely based pon direct reglation, or command and control (CAC) Inpt control: ban on certain toxic inpts Otpt control: each firm not allowed to emit more than X tonnes of polltant Y Technology control: reqirement to se particlar method or technology (e.g. BATNEEC= Best Aailable Technology Not Entailing Excessie Cost) Information reqirement for static cost effectieness: goernment mst know exact marginal costs of emission redction of EVERY firm: not feasible Sppose goernment dictates emission redction (otpt control) to firms that differ in marginal abatement cost (MAC) fnctions, where MACs are not eqalied 3 Instrments 9

3 The Economics of Climate Change C 75 Command and control Recall that efficiency reqires that MAC eqal oer all firms MAC MAC MAC MAC a f e b c d g 0 * R R R * R R R 0 3 Instrments 0

4 The Economics of Climate Change C 75 Command and control MAC MAC MAC a MAC 0 R * * R R ;R R f b e c d * R R * R R At total costs are c + d + e g R 0 3 Instrments

5 The Economics of Climate Change C 75 Command and control MAC MAC MAC 0 R R R ;R R MAC a f b g e c d R R * R R * R At total costs are a + b + c + d + e: inefficient! 0 3 Instrments

6 The Economics of Climate Change C 75 Command and control So CAC does not meet reqirement of static efficiency Neither is it dynamically efficient: Sppose all (new) firms are reqired to se technology X Then why deelop a technology that is cleaner? 3 Instrments 3

7 The Economics of Climate Change C 75 Command and control Why hae CAC policies been sed so often? Adantages of command and control: Very effectie: past experience shows sccesfl redction in emissions of many polltants Bt at higher total costs than with se of efficient instrment Politically attractie: firms prefer CAC to taxes and permits Becase technology standards prodce economic rents for firms; Rents can be sstainable if copled with more stringent reqirements for new sorces: entry deterrence! With actioned permits or taxes, firms pay abatement cost and also costs of emitting p to that leel. 3 Instrments 4

8 The Economics of Climate Change C 75 Command and control Can CAC play a role in climate policy? Many indstries face cap and trade and system (next week) Bt what abot consmers? Transport sector? Serice indstry? Often hard to redce emissions (serice sector) Too many consmers to monitor CO emissions Technology standards as well as otpt targets are and will be sed: Transport sector: car indstry has to meet reqirements for cars prodced Consmers: ban on sale of normal light blbs Consmers; serice indstry: energy labelling on electronic deices 3 Instrments 5

9 The Economics of Climate Change C 75 Pigoian taxation Externalities case inefficiency becase of the diergence between social and priate benefits or costs With a negatie externality, a tax can be sed to raise the priate marginal cost (or a sbsidy on emission redctions can be introdced) With a positie externality, a sbsidy can be sed to redce the priate marginal cost If the tax is set at the leel eqal to the marginal damage cased by an externality, then the tax is a Pigoian tax 3 Instrments 6

10 The Economics of Climate Change C 75 Pigoian taxation Example: correction of a negatie consmption externality Social marginal benefit (SMB) is below Priate marginal benefit (PMB) x m is market otcome x o is Pareto efficient with SMB = PMC Vale PMC PMB SMB o x m x Qantity 7/3

11 The Economics of Climate Change C 75 Pigoian taxation Example: correction of a negatie consmption externality Social marginal benefit (SMB) is below Priate marginal benefit (PMB) Vale t PMC' PMC The tax, t, raises Priate marginal cost from PMC to PMC PMB The qantity consmed falls from x m to x o x o is efficient with SMB = PMC o x m x SMB Qantity 8/3

12 The Economics of Climate Change C 75 Pigoian tax : A simple example Consider once more the windmill farmer and the winery Positie externality! See blackboard 3 Instrments 9

13 The Economics of Climate Change C 75 Pigoian taxation: A slightly more complicated case... Consider two consmers (index h=,) with tility fnctions U U x x Externality arises from consmption of good 0 0 For h '. we hae a positie externality For '. we hae a negatie externality h Assme that p x =p = and that agents hae income M Then bdget constraint reqires: x h = M- h 3 Instrments 30

14 Pigoian taxation The Economics of Climate Change C 75 x U x U x h = M- h Competitie eqilibrim: max M U 0 0 U Priate marginal benefit cons Similarly for consmer : 0 0 U Priate marginal benefit cons 3 Instrments 3

15 Pigoian taxation The Economics of Climate Change C 75 Social optimm (Pareto efficient allocation) with eqal welfare weights: W = U + U max M M W W Social marginal 0 0 W 0 0 W Social marginal benefit from Social marginal 0 0 Compare with priate (or market ) otcome: Social marginal benefit from Compare with priate (or market ) otcome: 3 Instrments 3

16 Pigoian taxation The Economics of Climate Change C 75 So far: consmer price eqals prodcer price which is eqal to FOC for consmer U max imply marginal tility = consmer price Idea: Can we set the consmer price, say q h, sch that social optimm is reslt of marginal tility eqals consmer price? Social optimm: 0 q W Social optimm: 0 q W The difference between the consmer price needed to reach the social optimm and the prodcer price is the Pigoian tax h :, q q N t i l!, q q Note: in general! 3 Instrments 33

17 The Economics of Climate Change C 75 Pigoian taxation Pigoian taxation appears a simple soltion: a price is set on the externality A tax is paid eqal to the marginal damage A sbsidy is receied eqal to marginal benefit Howeer, for Pigoiani tax In general taxes need to be differentiated between consmers, firms, and goods (depending di on the particlar externalities they case) Een when MD same for all agents, goernment needs to know that marginal damage to set correct Pigoian tax BUT: for ANY target leel, a tax is an efficient instrment For gien tax, firms will adjst emissions ntil MAC eqal tax: MAC eqalied oer all firms, hence tax cost effectie 3 Instrments 34

18 The Economics of Climate Change C 75 Taxation Tax income can be sed to lower distorting taxes (e.g. taxes on labor income with distortion of offering less labor) Weak doble diidend hypothesis: non enironmental welfare loss de to enironmental tax is lower if tax income is sed to lower distorting tax on e.g. labor income (compared to case where they are recycled in a lmp sm fashion) Strong doble diidend hypothesis: enironmental tax not only improes enironmental qality bt also non enironmental welfare 3 Instrments 35

19 The Economics of Climate Change C 75 Taxation Dynamic efficiency of emissions tax: If a firm has to pay pytper nit of emissions, then an emission redction always means less tax payments Gies incenties to deelop (or adopt) a new technology that redces emissions (for crrent emission leels) at lower costs (MAC < t) Ecological accracy: If there is ncertainty in MAC, then gien tax leads to ncertain emission redction Political feasibility: With taxation, large transfers of money: if target is to redce emissions by 0%, still taxes are paid oer 90% of initial amont > firms are hostile to taxes 3 Instrments 36

20 The Economics of Climate Change C 75 Sbsidies Economists are in faor of market based instrments like tax. Sbsidy is negatie tax. Is sbsidiing good behaior efficient? (emission redctions, or particlar technologies like solar panels, windmills) Political feasibility: yes!! Firms loe sbsidies! Bt less desirable in terms of efficiency: Hae to be financed throgh distorting taxes Hard to stop once started In case of sbsidy on particlar technology: dynamically inefficient: Does goernment know which technology is best? Hampers technology competition 3 Instrments 37