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Do Markets Provide Better Environmental Performance than Conventional Regulation?

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Do Markets Provide Better Environmental Performance than Conventional Regulation? A. Denny Ellerman Center for Energy and Environmental Policy Research – PowerPoint PPT presentation

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Title: Do Markets Provide Better Environmental Performance than Conventional Regulation?


1
Do Markets Provide Better Environmental
Performance than Conventional Regulation?
  • A. Denny Ellerman
  • Center for Energy and Environmental Policy
    Research
  • Massachusetts Institute of Technology
  • http//web.mit.edu/ceepr/www/
  • SEI Board Meeting
  • Dublin, Ireland
  • May 20, 2003

2
The Surprise Lesson from U.S. Emissions Trading
Programs
  • The Conventional Argument
  • Emissions trading reduces economic cost for
    achieving any given environmental goal
  • What has been learned
  • Costs are less (50 less in Acid Rain Program)
  • Environmental performance has been better than
    the conventional regulatory alternative
  • How could this be so?

3
Three Reasons for Better Environmental Performance
  • 100 (real) compliance
  • High cost units provided cheaper means of
    compliance than regulatory relaxation
  • Big, dirty units reduce the most
  • Grounded in economics of deep abatement
    technology
  • 1st Year Effect, especially with banking in
    phased-in programs

4
First Year Effect in Big Dirties
5
Why Did the Big, Dirties Reduce the Most?
  • Deep abatement technology is capital intensive
  • Economics depends on how many units of output the
    (large) fixed costs can be spread over
  • Cap Trade Programs pay per unit of abatement,
    while conventional regulatory programs do not

6
Why 100 Compliance? Exception and Equity
  • Cost heterogeneity implies C C rule will not
    fit allimposes unique hardship on some
  • Leads to administrative appeal and equitable
    exception that relaxes or delays requirement
  • One-sided processthose facing less cost than
    others never offer to do more
  • Fine line between equity and special pleading

7
Special Pleading Has Been Made Uneconomic
  • Cheaper to buy an offset than seek exception
  • Trading provides for automatic off-setting
  • Also, harder to claim unique hardship in a market
    with many buyers highest cost is price of an
    allowance
  • Easier to enforce allowance-emissions matching
    than prescriptive rules
  • Flexibility, simplicity strict accountability

8
How has Renewable Energy Procurement Fared?
Contracted (MWe) On stream (EOY 2002) Live
NFFO 1 (1990) 152 141 93
NFFO 2 (1991) 472 172 36
NFFO 3 (1994) 627 293 47
NFFO 4 (1997) 843 195 23
NFFO 5 (1998) 1,177 119 10
TOTAL 3,271 920 28
9
NFFO and RO Capacity (England Wales)
NFFO Contracts (1990-98) 3,271 MWe
NFFO Completed (12/31/02) 920 MWe
RO Accredited Effective 4/1/02 1,215 MWe
RO Accredited since 4/1/02 717 MWe
Total RO Accredited as of 1/31/03 1,932 MWe
10
Are Markets Supplanting Conventional Regulation?
  • Emissions Trading
  • Acid Rain Program was de novo
  • RECLAIM and NOx programs superseded conventional
    programs with ample authority
  • Too complicated to implement by regulation
  • ROCs Doubling of UK capacity with 3 target
  • From feudal fiat to fee simple Unbundling allows
    decentralization specialization
  • Avoiding pitfalls of informational asymmetries
    and the political uses of administrative
    discretion

11
Why Markets Now?
  • Technological Trends
  • Information revolution has greatly reduced cost
    of monitoring, reporting and processing
  • Societal Trends
  • Greater willingness to rely on markets and less
    faith in government and experts
  • Environmental Problems are Different
  • Blunt tools work only on big obvious problems

12
If it is feasible to establish a market to
implement a policy, no policy-maker can afford
to do without one.
A Concluding Thought
  • Pollution, Property and Prices
  • J. H. Dales (1968)
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