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Apr 2-13 - Lecture Notes - Intro to Env and Res Econ - Schaufele, Brandon.pdf

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University of Ottawa
Matthew Archibald

L ECTURE N OTES FOR INTRODUCTION TO E NVIRONMENTAL AND N ATURAL RESOURCE E CONOMICS ECO2118 U NIVERSITY OF O TTAWA L ECTURE D ATE: March 22, 2013 I. Climate Change Policies Benefits from climate policy:  Avoided losses o E.g., severe weather patterns, hobbled ecosystems, less biodiversity, less potable water, loss of coastal areas, increases in mean temperatures, more infectious disease o Among other things a warming world affects: agricultural yields, timbre, water, resource productivity  Non-market effects  Ancillary benefits o E.g., reduced air pollutants such as CO, SO , NO x x  Averted catastrophes Carbon Taxes  Carbon taxes fix the cost of carbon and allow the quantity of emissions to be determined by the market  Taxes can be levied: o Upstream on refineries, coal shippers, etc. o Downstream on homeowners, vehicle owners  Carbon taxes provide a constant incentive to reduce emissions as firms respond to the policy by: o Reducing in fossil fuel usage o Improving energy efficiency o Investing in new lower emissions technologies  Equimarginal principle holds with carbon taxes as each firm equates marginal abatement costs o Producers will minimize their total private costs by reducing emissions until the tax rate equals their marginal abatement costs  That is, if it is cheaper to abate a ton2e of CO than it is to pay the tax, a firm is better off abating the tonne o Broad based taxes (those without exemptions) lead to identical MACs across all firms 1  A socially efficient caron tax should be set sohat the tax quals the SCC  Taxes do not guarantee a fixed levelof emissions reductions – i.e., emsion levels re unncertain  Bureaucracies already exist to collet taxes, so litttle needs to be donministrativly  Countries witth carbon txes: Swedenn, Denmark, NNorway, UK K, Australia o UK haas a £16tCO 2ax on elecctricity genration  Rises to 30 by 2020  Floor prie for EU ETTS o Australia  Enacted a carbon tax on July 1, 012  Initially s at A$23 CO e2for bussinesses thatemit over 25,000 tonne s  Coovers 60% off Australias emissions  Increasesby 2.5% per year until 215-16 whe en Australiawill switchto a cap-and-trade system Carbon TTaxation annd the Doublle Dividend  Many argue t that a reveue neutral crbon tax can produce a “double diviidend” o 1 dividend – pollution goes down due to the Pigouviian tax o 2 divvidend – economic outpuut may increase due to a reduction n distortioary taxaton  Most taxes arre distortiary o E.g.,income taxes reduce the returns toabour and discourage woork  For exampple, many Chhartered Accountants woork substantial overtime during tax season  Affter tax seon, then, they can cash n these overtime houurs. Frequently, they ae eligible r either a drect payoutof their extra tie which is axed or are able to takadditional vacation time which is untaxed. Socieety prefershat they take the payout becausee this means that they will continueo work an d 2 contribute to the economy; however, as tax rates increase, it becomes more likely that vacation time will be selected.  Inefficiency of taxation is measured using marginal cost of public funds (MCF) o E.g., it costs society $1.25 in economic welfare for the government to raise $1 in revenue because there will be reductions in labour (the $1 in government revenue may generate greater or fewer benefits than the $1.25 cost but this is irrelevant to the double dividend argument)  If carbon taxes have lower MCFs than alternative taxes, then it is possible to levy a carbon tax and reduce other more distortionary taxes without altering the government’s total budget – this produces the two dividends Cap-and-trade or Transferable Emissions Permits  Non-tax mechanism to equate marginal abatement costs  Regulator sets a cap on allowable emissions of CO 2  It then allocates permits to firms o A permit represents the right (property right) to discharge a specific volume of the pollutant - one tonne of CO2 o Total permits allocated cannot exceed the cap o Firms that require more permits must purchase them from firms that require fewer  Carbon prices are determined in a market as permits are transferred from low cost abaters to high cost abaters o Both parties gain from the exchange (i.e., gains from trade)  While emissions levels are f
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