Emissions Trading, An Exercise in Reforming Pollution Policy

By T. H. Tietenberg | Go to book overview
Though in general the approach taken by the EPA in the emissions trading program has made market power more likely than necessary, the degree to which this manipulation could interfere with the basic objectives of the program seems small. The potential cost savings is sufficiently large that even if markets were quite noncompetitive (an unlikely outcome), the emissions trading program would still be more cost effective than the command-and-control allocation.Should local control authorities become concerned that a unique circumstance in their trading area has created the threat of market power, the control authority could use its eminent domain authority to purchase (not confiscate!) shutdown credits by providing just compensation. Just compensation would be defined in terms of previous emission reduction credit transactions in that area, the rate of inflation, and other relevant factors. The control authority could then sell the credit to some new source at a price which was sufficient to cover its costs (including administration costs). This option would only be exercised when the only offsets for sale were the shutdown credits and where the market power threat seemed particularly high. Because it would presumably be exercised only when a willing buyer was available, the cash flow implications for the control authority would be minimal.
SUMMARY
Two rather distinct types of market power are possible in transferable permit markets. The first arises when a price-setting source or a collusive coalition of sources seeks to manipulate the price of permits for their own financial gain. The second stems from the desire of one predatory source or a collusive coalition of sources to use the permit market as a vehicle for reducing the competition they face in product or factor markets.
In permit auction (subsidy) markets, price-setting sources purchase (sell) fewer permits than is cost effective. Control costs are higher than the least-cost allocation, but the financial burdens borne by all sources (not merely the price-setting source) are lower. Air quality is not adversely affected, but revenues received by (paid by) the control authority are reduced (increased).
The available evidence suggests that price manipulation in permit auctions under the worst circumstances can have a large influence on price, but a relatively small influence on control costs. In the available empirical studies, control costs typically rise no more than 1 percent above the least-cost solution. Compared with the potential savings

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Emissions Trading, An Exercise in Reforming Pollution Policy
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables ix
  • Preface xi
  • Abbreviations xiv
  • 1 / Introduction 1
  • References 13
  • 2 - /The Conceptual Framework 14
  • References 35
  • 3 - The Potential For Cost Savings 38
  • Summary 56
  • 4 - The Spatial Dimension 60
  • Summary 89
  • 5 - Distributing The Financial Burden 93
  • Summary 120
  • References 123
  • 6 - Market Power 125
  • Summary 145
  • 7 - The Temporal Dimension 149
  • Summary 165
  • 8 - Enforcement 168
  • Summary 184
  • 9 - Evaluation and Proposals For Further Reform 188
  • Concluding Comments 213
  • References 214
  • Index 217
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