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Tradable Pollution Permitsor
Green Taxes/Subsidies?
James Stodder, (Ph.D., Economics, Yale 1990)Lally School of Management & Technology
Rensselaer Polytechnic Institute at HartfordHartford, Connecticut, USA
Stodder, Presentation on Pollution Permits, Sept. 14, 2011
CO2 and Temperature Change
http://www.ngdc.noaa.gov/paleo/icecore/antarctica/vostok/vostok_data.html Stodder, Pollution Permits, Sept. 14, 2011 2
CO2 and Industrialization
http://www.globalwarmingart.com/wiki/Image:Carbon_Dioxide_400kyr.png
3Stodder, Pollution Permits, Sept. 14, 2011
Surface Temp & Hurricane Intensity
“Increasing destructiveness of tropical cyclones over the past 30 years”, Nature, 8/4/05, ftp://texmex.mit.edu/pub/emanuel/PAPERS/NATURE03906.pdf
Hurricane Intensity - - -
Sept. Surface Temp __
4Stodder, Pollution Permits, Sept. 14, 2011
Stodder, Pollution Permits, Sept. 14, 2011 5
Majority Believes in Global Warming
Source: Yale University Project on Climate Change Communication
Good Old Supply & Demand!
Stodder, Pollution Permits, Sept. 14, 2011 6
Planning is Perfect – if No Uncertainty!
Stodder, Pollution Permits, Sept. 14, 2011 7
But if Costs are Uncertain …
Stodder, Pollution Permits, Sept. 14, 2011 8
… Outcome with Quantity Controls
Stodder, Pollution Permits, Sept. 14, 2011 9
Losses with Quantity Controls
Stodder, Pollution Permits, Sept. 14, 2011 10
Losses with Quantity Controls
Stodder, Pollution Permits, Sept. 14, 2011 11
With Cost Controls, further from Equ.
Stodder, Pollution Permits, Sept. 14, 2011 12
Stodder, Pollution Permits, Sept. 14, 2011 13
Greater Losses with Cost Controls
Steep Decline in Benefits => Quantity Controls
14Weitzman (1973)
What if more Gradual Define in Benefits?
Stodder, Pollution Permits, Sept. 14, 2011 15
Stodder, Pollution Permits, Sept. 14, 2011 16
Quantity or Cost Controls?
Stodder, Pollution Permits, Sept. 14, 2011 17
Cost Controls Closer to Equilibrium
Stodder, Pollution Permits, Sept. 14, 2011 18
Quantity Controls Further from Equilibrium
19
Costs more steeply sloped than Benefits => Cost Controls
Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf
Stodder, Pollution Permits, Sept. 14, 2011 20
Best Method is an Empirical Question:
If Social Benefits are Less Price Sensitive (More Steeply Sloped) than Costs =>
Use Quantity Controls(Pollution Permits).
21Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf
Benefits more steeply sloped than Costs=> Quantity Controls
Stodder, Pollution Permits, Sept. 14, 2011 22
If Social Benefits are More Price Sensitive
(Less Steeply Sloped) than Costs =>
Use Cost Controls (Taxes / Subsidies).
23
Costs more steeply sloped than Benefits => Cost Controls
Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf
Stodder, Pollution Permits, Sept. 14, 2011 24
Volatility of S02 Prices, US: 1995-2006
William Nordhaus (Copenhagen, 2009)
Stodder, Pollution Permits, Sept. 14, 2011 25
Basic Business Argument:
What is more important for your Business?• Knowing the future price of energy that your
business must pay?
or …
• Knowing the future quantity of energy that the country as a whole must use?
Stodder, Pollution Permits, Sept. 14, 2011 26
Additional Arguments:
• Carbon taxes will make the cost of carbon-based energy higher, but also more stable.
• Taxes on energy are already in place. Pollution Permits would require new levels of bureaucracy.
• Much easier to tax oil at the refinery than check pollution permits at the tail pipe or smokestack.
• Carbon tax applies to all users, while permits are monitored for just the biggest polluters.
What about the Recession?
Stodder, Pollution Permits, Sept. 14, 2011 27
Martin Wolf, Financial Times, Sep. 6, 2011
Bond Market Worried About Growth
28http://research.stlouisfed.org/fred2/graph/?id=FII10,