The current time slot for the abstract is: June 1: 4:00 PM - 5:30 PM
Inefficiencies and Perverse Incentives in Greenhouse Gas Cap-and-Trade Schemes: The Case of Electric Sector Caps and Electric Vehicles
3.2 Carbon trading and offsets, carbon taxation
Oral
Name: Jonathan Dowds PresenterAffiliation: University of Vermont
There is significant agreement that we have exceeded the atmosphere’s capacity to absorb greenhouse gases while maintaining climatic stability. In order to prevent a dramatic shift in climate, the level of atmospheric greenhouse gases must be stabilized and even reduced, which would require significant reductions in the rate of greenhouse gas (GHG) emissions. Achieving these reductions as efficiently as possible will minimize the social and economic disruptions associated with reductions of GHG emissions. Cap-and-trade systems, one mechanism for achieving efficient greenhouse gas reductions, have gained considerable political support. Cap-and-trade is well suited to problems such as GHG emissions where a high level of certainty is desired regarding overall emissions levels and where aggregate reductions are more important than geographically specific reductions. In comparison with a straight regulatory approach, cap-and-trade can achieve least cost reductions in GHGs by creating incentives for companies that can cheaply reduce emissions to do so. By creating a price for emissions through allowance trading, cap-and-trade creates an incentive for all covered companies to reduce emissions until they face an equimarginal abatement cost. In the conception of Daly and Farely, cap-and-trade systems provide both macro-control, an absolute limit on GHG emissions, and micro-freedom, the ability for all of each entity to pick its own strategy for compliance. The realized efficiency of cap-and-trade systems, however, depends on the particular system’s design and implementation and may be reduced if the scope of the program is too narrow. Inefficiencies may result from excluding industries with lower marginal abatement cost curves, increasing risk of market power and reduced liquidity in the allowance market, and inducing intersectoral substitution between regulated and unregulated sectors. Production shifting or “leakage,” between capped and uncapped regions, has been widely studied but intersectoral substitution, between capped and uncapped economic sectors, has received much less attention. Advances in electric vehicle technology mean that an intersectoral substitution toward the consumption of more polluting resources may come into play when electric power generation is put under a cap-and-trade system but the transportation sector is not. Several current and proposed cap-and-trade programs have been targeted solely at the electric power sector, which reduces their efficiency relative to broader programs and creates perverse incentives against the adoption of electric vehicles which may offer potentially significant GHG benefits. Programs of broader scope reduce the dangers of market power and illiquidity and limit the risk of environmentally disadvantageous intersectoral substitutions.
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