Part III Lecture 1 Tax vs Permits vs CAC Carbon Taxes vs Permits To economists there are two main families of optimal highest efficiency carbon controls Carbon taxes Carbon permits or auctions also called cap and trade Carbon tax whenever you emit carbon you pay a tax of x Carbon permit whenever you emit carbon you have to turn in a permit You have to have a permit for each ton of carbon Where do you get those permits The government decides the initial allocation Maybe the government gives you some 9allotment Maybe you buy them at a government auction Maybe you buy them from some other firm Turns out they are in a simple model the same in terms of price Q reduced and Which is best government revenue Price of a Carbon Permit a price for carbon Because people will buy and sell permits at an auction or from each other this establishes We can make the price of a prie of a permit equal to a carbon tax How We can establish an auction and see what people bid If the price is going too high sell more permits If it is too low government can buy them back Examples California has a permit scheme and auction off permits Same with Alberta China the EU and Switzerland British Columbia Sweden the UK Norway and many others do a tax Both types of policies can make revenue for the government Tax we talked about earlier Auction The firms pay the government the price of the permit In one case you pay after you pollute the other you pay before you pollute We can get to the exact same equilibrium through either the price axis or through the quantity of pollution reduced axis Learning About Permit Prices Getting to a well functioning permit market is not automatic You know where to buy toothpaste but where would you buy a carbon permit Who is selling and buying Often regulatory agency like the EPA or California s ARB needs to get things These markets are often volatile for w whole because firms may not know how started and establish a clearing house hard or easy it is to reduce carbon What is the yellow box under a tax system What is the yellow box under a permit auction Who cares if these are the same Quantity of pollution abatement and tax auction revenue is the same for either program This equivalence means we do not have to favor one or the other on efficiency grounds Secondary Reasons Uncertainty Seminal work by Martin Weitzman Only equivalent if demand and supply for pollution reductions goes as planned What if you have a tax but it becomes more valuable to pollute Pollution will increase What if you have cap and trade Same pollution higher permit price A tax ensures we won t cross any compliance cost thresholds while Cap and Trade prevents crossing damage thresholds A tax won t ground all air travel accidentally But a tax might push you over a key tipping point accidentally Cap and Trade with Business Cycles What if we go into a recession Less demand for permits Price falls Or opposite in expansion no extra pollution but very expensive Unpredictable costs for firms Under a tax these unexpected shifts also cause problems The future price of permits is unknown which dampens investment Unexpectedly more pollution than planned In an economic expansion people will just pollute more and pay the tax Economists tend to favor carbon taxes Secondary Reason Moral Tax Auction Sin taxes are common cigarettes alcohol Some feel this is like a license to pollute meaning that it makes polluting morally acceptable Other Reasons to Pick Tax Easy to administer with existing structures don t have to organize an auction However the agencies that tax IRS often do not have the same goals as agencies that track the environment EPA Auction Can give the permits away for free This can help to convince industry as was done in Australia Called grandfathering permits Still limits the total pollution but firms only pay other firms if they need extra Can issue permits to firms that consume carbon Carbon sequestration offsets Can be done entirely by EPA as done with SO2 auctions Part III Lecture 2 Value of Statistical Life Question A new policy attempts to reduce pollution by moving a coal power plant outside of the city Does this pass a Cost Benefit test Yes because one 95 year old lives one extra day infinite benefit VSL Value of Statistical Life What is this value If the value is high we will often enact more environmental policies since pollution is generally a health hazard EPA uses 9 1 million but in the past has used values closer to 5 million Other agencies use different numbers In cost benefits test for policy particularly environment deaths are often extremely important VSL in Climate Change It is the most important number in climate change currently So where does the VSL of 5 9 million come from Many ways to get at it Labor market studies show how people trae risk against pay often called hedonic wage method Nonmarket Valuation Revealed Preferences Hedonic Pricing Characteristics of a good each contribute to its value Environmental amenities are priced in in housing market Travel cost Can we learn about the value of a site and it amenities by observing States Preference Sometimes these revealed methods don t work Surveys fill an important gap in valuation Called contingent valuation methods because they are Use Value vs Non use Value States preference is the only method of getting at non use value Non use value is the value of something I never actually interact with Arctic National Wildlife refuge Biodiversity in the rainforest I may never visit these places but I value them simply existing There are also many psychological effects that come into play Let s look at one of these in particular Willing to Pay WTP The most you are willing to pay to get a good ro service Willing to Accept WTA The amount you need to be paid to lose a good or service WTP vs WTA Usually we ask people in a lab how much would you pay for a mug WTP or give them a mug and ask how much Hedonic Wage Method Made up example Annual Pay 34 000 Annual Pay 32 000 34 000 32 000 0 00102 0 00020 2 4 million People seem to be willing to pay to avoid risk but it s not infinite Logging 0 102 Taxi Driver 0 020 Unsurprisingly these values can vary substantially by country income group age etc We sometimes correct for age but rarely for income group or other demographics A Few Notes It is called the value of statistical life not value of a life People would probably behave differently for certain death It is also not an argument against any influence of