Economics Dictionary of ArgumentsHome
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| Cap-and-trade system: A cap-and-trade system is a market-based approach to controlling pollution by setting a cap on the total amount of emissions allowed and creating a market for emission permits. Emitters can buy and sell permits, which allows them to exceed the cap. See also Emissions trading, Emission targets, Emission reduction credits, Emission permits, Emissions._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Robert N. Stavins on Cap and Trade System - Dictionary of Arguments
Stavins I 157 Cap-and-Trade Systems/Aldy/Stavins: A cap-and-trade system constrains the aggregate emissions of regulated sources by creating a limited number of tradable emission allowances—in sum equal to the overall cap—and requiring those sources to surrender allowances to cover their emissions (Stavins, 2007)(1). Faced with the choice of surrendering an allowance or reducing emissions, firms place a value on an allowance that reflects the cost of the emission reductions that can be avoided by surrendering an allowance. Regardless of the initial allowance distribution, trading can lead allowances to be put to their highest valued use: covering those emissions that are the most costly to reduce and providing the incentive to undertake the least costly reductions (Hahn & Stavins, in press(2); Montgomery, 1972)(3). Cap-and-trade sets an aggregate quantity, and through trading, yields a price on emissions, and is effectively the dual of a carbon tax that prices emissions and yields a quantity of emissions as firms respond to the tax’s mitigation incentives. VsCap-and-Trade: In an emission trading program, cost uncertainty—unexpectedly high or volatile allowance prices—can undermine political support for climate policy and discourage Stavins I 158 investment in new technologies and research and development. Therefore, attention has turned to incorporating “cost-containment” measures in cap-and-trade systems, including offsets, allowance banking and borrowing, safety valves, and price collars. Increasing certainty about mitigation cost [through the above methods] reduces certainty about the quantity of emissions allowed. 1. VsVsCap-and-Trade: Smoothing allowance prices over time through banking and borrowing reduces the certainty over emissions in any given year, but maintains certainty of aggregate emissions over a longer time period. A cost-effective policy with a mechanism insuring against unexpectedly high costs—either through cap-and-trade or a carbon tax—increases the likelihood that firms will comply with their obligations and can facilitate a country’s participation and compliance in a global climate agreement. In the case of a cap-and-trade regime, the border adjustment would take the form of an import allowance requirement, so that imports would face the same regulatory costs as domestically produced goods. 2. VsCap-and-Trade: However, border measures under a carbon tax or cap-and-trade raise questions about the application of trade sanctions to encourage broader and more extensive emission mitigation actions globally as well as questions about their legality under the World Trade Organization (Brainard & Sorking, 2009(4); Frankel, 2010(5)). >Carbon Pricing/Stavins. Stavins I 172 Cap-and-Trade Linkages/Carbon Pricing Coordination/Stavins: Because linkage between tradable permit systems (that is, unilateral or bilateral recognition of allowances from one system for use in another) can reduce compliance costs and improve market liquidity, there is great interest in linking cap-and-trade systems with each other. There are not only benefits but also concerns associated with various types of linkages (Jaffe, Ranson, & Stavins, 2010)(6). A major concern is that when two Stavins I 173 cap-and-trade systems are directly linked (that is, allow bilateral recognition of allowances in the two jurisdictions), key cost-containment mechanisms, such as safety valves, are automatically propagated from one system to the other. Because some jurisdictions (such as the European Union) are opposed to the notion of a safety valve, whereas other jurisdictions (such as the United States) seem very favorably predisposed to the use of a safety valve, challenging harmonization would be required. This problem can be avoided by the use of indirect linkage, whereby two cap-and-trade systems accept offsets from a common emission-reduction-credit system, such as the Clean Development Mechanism. As a result, the allowance prices of the two cap-and-trade systems converge (as long as the ERC market is sufficiently deep), and all the benefits of direct linkage are achieved (lower aggregate cost, reduced market power, decreased price volatility), but without the propagation from one system to another of cost-containment mechanisms. (...) it is important to ask whether a diverse set of heterogeneous national, subnational, or regional climate policy instruments can be linked in productive ways. The basic answer is that such a set of instruments can be linked, but the linkage is considerably more difficult than it is with a set of more homogeneous tradable permit systems (Hahn & Stavins, 1999)(7). Another form of coordination can be unilateral instruments of economic protection, that is, border adjustments. >Carbon Pricing Coordination/Stavins. 1. Stavins, R. N. (2007). A U.S. cap-and-trade system to address global climate change (The Hamilton Project Discussion Paper 2007-13). Washington, DC: The Brookings Institution. 2. Hahn, R. W., & Stavins, R. N. (in press). The effect of allowance allocations on cap-and-trade system performance. Journal of Law and Economics. 3. Montgomery, D. W. (1972). Markets in licenses and efficient pollution control programs. Journal of Economic Theory, 5, 395-418. 4. Brainard, L., & Sorking, I. (Eds.). (2009). Climate change, trade, and competitiveness: Is a collision inevitable? Washington, DC: Brookings Institution Press. 5. Frankel, J. (2010). Global environment and trade policy. In J. E. Aldy & R. N. Stavins (Eds.), Post-Kyoto international climate policy: Implementing architectures for agreement (pp. 493-529). New York, NY: Cambridge University Press. 6.Jaffe, J., Ranson, M., & Stavins, R. (2010). Linking tradable permit systems: A key element of emerging international climate policy architecture. Ecology Law Quarterly, 36, 789-808. 7. Hahn, R. W., & Stavins, R. N. (1999). What has the Kyoto Protocol wrought? The real architecture of international tradeable permit markets. Washington, DC: The AEI Press. Robert N. Stavins & Joseph E. Aldy, 2012: “The Promise and Problems of Pricing Carbon: Theory and Experience”. In: Journal of Environment & Development, Vol. 21/2, pp. 152–180._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Stavins I Robert N. Stavins Joseph E. Aldy The Promise and Problems of Pricing Carbon: Theory and Experience 2012 |
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