Determining Project-Based Emissions Baselines with Incomplete Information

Project-based mechanisms for emissions reductions credits, like the Clean Development Mechanism, pose important challenges for policy design because of several inherent characteristics. Participation is voluntary. Evaluating reductions requires assigning a baseline for a counterfactual that cannot be measured. Some investments have both economic and environmental benefits and might occur anyway. Uncertainty surrounds both emissions and investment returns. Parties to the project are likely to have more information than the certifying authority. The certifying agent is limited in its ability to design a contract that would reveal investment intentions. As a result, rules for baseline determination may be systematically biased to overallocate, and they also risk creating inefficient investment incentives. This paper evaluates, in a situation with asymmetric information, the efficacy of the main baseline rules currently under consideration: historical emissions, average industry emissions, and expected emissions.climate policy, Clean Development Mechanism, baseline emissions, asymmetric information

Are Absolute Emissions Better for Modeling? It's All Relative

Some environmental policies focus on emissions intensity rather than total emissions, or they try to mitigate the regulatory impact on the final product market. To analyze the effects of these policies, or to evaluate the distributional effects of any regulation on consumers and producers, output must be incorporated explicitly into an economic model of abatement, separately from the emissions variable. This provides two options. Traditionally, total emissions and output are the independently controlled variables, leaving emissions intensity as endogenously determined. Alternatively, one can make emissions intensity and output the control variables, leaving total emissions as the endogenously determined variable. One is the dual of the other and the problems are equivalent, but the latter method offers more transparency for examining intensity-based policies. This note shows how the intensity-based model fits into the traditional context.emissions intensity, emissions standards, environmental tax, pollution, tradable emissions permits

Multinational Taxation and International Emissions Trading

Many studies have shown that the activities of multinational corporations are quite sensitive to differences in income tax rates across countries. In this paper, I explore the interaction between multinational taxation and abatement activities under an international emissions permit trading scheme. Four types of plans are considered: (1) a single domestic permit system with international offsets; (2) separate national permit systems without trade; (3) separate national permit systems with limited offsets; and (4) an international permit trading system. For each plan, I model the incentives for the multinational firm to choose abatement activities at home and abroad and to transfer emissions credits between parent and subsidiary. Limits on trading across countries restrict efficiency gains from abatement, as is well known. But I show furthermore that if available offset opportunities are limited to actual abatement activities, those activities are more susceptible to distortions from incentives to shift taxable income. Transfer pricing rules can limit but not always eliminate these distortions. In a system of unlimited international trading, abatement is efficiently allocated across countries, but tax shifting can still be achieved through intra-firm transfer pricing. From the basis of efficiency for both environmental and tax policies, the best design is an international permit trading system with transparent, enforceable transfer pricing rules.emission permits, transfer pricing, taxation, multinational corporations

Read This Paper Later: Procrastination with Time-Consistent Preferences

A model of time-consistent procrastination is developed to assess the extent to which the observed behavior is compatible with rational behavior. When a finite work requirement must be completed by a deadline, the remaining time for leisure is an exhaustible resource. With a positive rate of time preference, the optimal allocation of this resource results in more hours spent working (and fewer in leisure) the closer the deadline. Key qualitative findings of psychological studies of academic procrastination are consistent with the standard natural resource management principles implied by the model, when suitably adapted to task aversiveness, uncertainty, and multiple deadlines. However, quantitatively, the fully rational model requires an extremely high rate of time preference or elasticity of intertemporal substitution to generate serious procrastination; furthermore, it cannot explain undesired procrastination. A companion paper, "Read This Paper Even Later: Procrastination with Time-Inconsistent Preferences" analyzes the extent to which alternative time discounting preferences can better explain such impatience and address the issue of self-control failures.

Combining Rate-Based and Cap-and-Trade Emissions Policies

Rate-based emissions policies (like tradable performance standards) fix average emissions intensity, while cap-and-trade policies fix total emissions. This paper shows that unfettered trade between rate-based and cap-and-trade programs always raises combined emissions, except when product markets are related in particular ways. Gains from trade are fully passed on to consumers in the rate-based sector, resulting in more output and greater emissions allocations. We consider a range of policy options to offset the expansion, including unilateral ones when jurisdictional differences require. The cap-and-trade jurisdiction could impose an "exchange rate" to adjust for relative permit values, but marginal abatement cost equalization is sacrificed. Still, that jurisdiction may prefer adjusted trade over tightening their own cap, which transfers away rents. Although the rate-based sector would have to implement the switch to output-based allocation of a cap, its surplus would be higher than with adjusted trade, which is also preferred to no trade. The cap-and-trade sector would also be better off. Thus, a range of combinations of tighter allocations could improve situations in both sectors with trade, while holding emissions constant.emissions trading, permit allocation, tradable performance standards, climate, greenhouse gases

Who Pays for Energy Efficiency Standards?

Policies to promote energy efficiency in household appliances have different impacts, depending on the structure of market supply. If provision is perfectly competitive, markets will offer the variety of energy efficiency levels that consumers demand. However, if producers can price discriminate, using energy intensity to help segment consumer demand, consumers of low-end appliances are offered too little energy efficiency so that high-end consumers can be charged more for efficient appliances. Minimum energy efficiency standards can then improve welfare. We also consider average intensity standards, energy prices, and innovation and identify important differences in their effects on energy intensity, welfare, and consumers, depending on market structures. To evaluate the role for policy, one must know not only how consumers value energy efficiency in their decisionmaking, but also how producers respond to those values.energy efficiency, appliance, standards, price discrimination

Emissions Pricing, Spillovers, and Public Investment in Environmentally Friendly Technologies

In a second-best world of below-optimal pollution pricing, the public return to R&D may be greater than under Pigouvian pricing, due to excess benefits of increasing abatement, or it may be lower, since private actors lack the incentives to take full advantage of the new, cleaner technologies. This paper uses a simple model to demonstrate the interaction between environmental policies, R&D externalities, and the social return to innovation. The results indicate that strong public support for innovation is only justified if at least a moderate emissions policy is in place and spillover effects are significant. Furthermore, in most cases, policy constraints that limit regulatory burdens tend to further limit the scope for public support, even when cost reductions allow for more stringent abatement targets. An exception is when knowledge of the policy adjustment process further reduces private innovation incentives.emissions price, technological innovation, spillovers, R&D policy

Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition

Environmental policies with output-based refunding of the revenues effectively combine a tax on emissions with a subsidy to output. Three similar forms exist: tradable performance standards, an emissions tax with rebates, and tradable permits with output-based allocation. Two arguments for including an output subsidy are imperfect competition, in which an environmental regulation alone could exacerbate output underprovision, and imperfect participation, in which imposing a regulation on a subset of polluters could cause output to shift to exempt firms. However, both these scenarios imply that output shares among program participants are likely to be significant. In this situation, output-allocated permits offer less of a subsidy than a fixed rebate, and they can lead to inefficient shifting of production among participants. Rebating the emission tax reduces the incentive to abate, nor will marginal abatement costs be equalized if costs differ. These results hold in a Cournot duopoly model whether emission rates are determined simultaneously or strategically in a two-stage model.emission tax, permit allocation, earmarking, tradable performance standards

Market Power and Output-Based Refunding of Environmental Policy Revenues

Output-based refunding of environmental policy revenues combines a tax on emissions with a subsidy to output. With imperfect competition, subsidies can discourage output underprovision. However, when market shares are significant, endogenous refunding suffers compared to a fixed subsidy. Refunding the emissions tax according to market share reduces the incentive to abate, and marginal abatement costs will not be equalized if market shares differ. In a Cournot duopoly, endogenous refunding leads to higher output, emissions, and possibly costs compared to a fixed rebate program. These results hold whether emission rates are determined simultaneously or strategically in a two-stage model.emissions tax, earmarking, tradable performance standards, imperfect competition, Cournot, duopoly, refunding, subsidy

Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards

Political pressure often exists to earmark environmental tax revenues or permit rents to the industry affected by the regulation. This paper analyzes schemes that rebate revenues based on output shares: tradable performance standards, an emissions tax with market-share rebates, and tradable permits with output-based allocation. All three policies effectively combine a tax on emissions with a subsidy to output. The result is a shifting of emissions control efforts toward greater emissions rate reduction and less output contraction, with higher marginal costs of control and lower output prices compared to the social optimum, given any targeted level of abatement. These welfare costs depend on the degree of output substitutability and are likely to be much larger in the long run. While some political and market-failure justifications may exist, policy makers should carefully consider industry characteristics before engaging in output-based rebating.emission tax, permit allocation, earmarking, tradable performance standards