The Successes of Cap and Trade - College of...

The Successes of Cap and Trade

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FIGURE 16b

Annual Mean Wet Sulfate Deposition 2001 through 2003Source: National Atmospheric Deposition Program

FIGURE 16a


FIGURE 15b

Annual Mean Ambient Sulfate Concentration 2001 through 2003Source: CASTNET

FIGURE 15a


J. Parman (College of William & Mary) Regulation of Markets, Spring 2013 April 3, 2013 1 / 23


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FIGURE 16b


FIGURE 16a


FIGURE 15b


FIGURE 15a




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Concluding Thoughts

While EPA’s focus in this paper is the allowance market, it is important to keep these observations in context. Regardless of market activity or movements in allowance prices, the core purpose of the cap and trade mechanism is to achieve emissions reductions. Figure 3 shows that irrespective of what occurred in the allowance market, SO2 emissions have decreased markedly under the Acid Rain Program while the combustion of fossil fuels, measured as “heat input,” for electricity generation has increased significantly. These are the core results of the program. Notably, electricity prices have fallen due to restructuring and decreasing fuel prices while these reductions were occurring. Despite a few large increases in allowance prices for short periods of time, we have not seen electricity price jumps, and therefore, consumers have not been hurt by these changes. Figure 3: Significant Drops in Emissions as Fossil Fuel Combustion and Electricity Generation Increase

The principal driver behind the temporary periods of higher prices in the federal SO2 and NOX markets examined in this paper is the advent of aggressive new control programs. Stringent new policies require a market adjustment to account for the new, higher allowance values that more appropriately reflect new, higher costs of compliance. There have been a wide range of allowance cost estimates that market participants have to consider while they learn to adapt to the market situation. As caps shift downward and marginal costs of control increase, market participants use their best judgments about future control costs and market dynamics to make informed decisions. The initial uncertainty about allowance availability and the cautious nature of the regulated entities potentially exacerbate any normally expected increase. Many other factors including fuel

* Generation from fossil fuel-fired plants. ** Constant year 2000 dollars adjusted for inflation. Source: Energy Information Administration (electricity generation, retail price); EPA (heat input and emissions, representing all affected ARP units), 2008

Trends in Electricity Generation, Fossil Energy Use, Prices and Emissions from the Electric Power Industry



From the EPA’s “Cap and Trade: Acid Rain ProgramResults” factsheet:

A 2003 OMB study found that the program accountedfor the largest quantified human health benefits ($70billion annually) of any major federal regulatoryprogram implemented in the last ten years

Benefits of the program have exceeded costs by morethan 40:1

Ambient concentrations of SO2 have decreased by 40%since 1990

The price of an allowance has been far lower than pricespredicted in 1990


Is This Success the Norm?

So the Acid Rain Program seems to be a huge success

As the OMB suggests, it may be the biggest success offederal environmental regulation

Raises the question of how successful other regulationshave been

Let’s take a look at Superfund


The Cost-Effectiveness of Superfund



Percentage of remediation expenditures, ranked by cancer

cost effectiveness

Cumulative percentage of expected cancer cases

averted

Marginal cost per cancer case averated ($

millions)5 99.47 145

25 99.86 1,10750 99.96 6,44275 99.97 28,25795 99.98 241,058

Superfund Cost-Effectiveness



Recall that Superfund sites must be cleaned up eitherby the responsible party or by the federal government

What is the threshhold for becoming a Superfund site?

Mandatory cleanup if site poses a potential lifetimecancer risk of one in 10,000

EPA’s discretion if lifetime risk is one in 1,000,000

Things that increase risk of dying by one in 1,000,000:

Driving 40 miles by carDrinking 500 mL of wineEating 40 tablespoons of peanut butterCanoeing 6 minutesOne chest X-ray



Another issue with Superfund cost-effectiveness is theway the EPA does calculations

There are a lot of steps from the amount of chemicals inthe ground to the improvements in health from cleanupThe lifetime cancer risk from a chemical is given by:

(exp. duration) · (exp. frequency) · (ingestion rate) · (contaminant conc.) · (toxicity)(body weight) · (averaging time)

EPA uses very cautious estimates (95th percentile) foritems in numerator

Economists would tend to use means to maximizeexpected net benefits of cleanup (but also lead to moreexpected deaths)



There are a few key cost-benefit analysis componentsmissing from the Superfund approach

First, how do you compare reduced cancer risk tocleanup costs?

Second, there are a variety of other effects ofenvironmental damage:

Health issues that don’t result in death (but still aren’tfun)Lost economic output and wages from environmentaldamage (or from not allowing damage)Loss of environmental resources (species, clean water,etc.)Lost aesthetic value of pristine nature

To understand how to think about these issues, we’regoing to turn to the BP and Exxon oil spills


Valuing Environmental Damage



So what exactly was BP paying for in terms of actualdamages (rather than the punitive damages)?

From the BP Claims Form for individuals andbusinesses:

Property damageLoss of profits or impairment of earning capacityRemoval costsSubsistence use (Note: pleasure hunting and/or fishingis excluded)

All of these are fairly easy to put dollar values on

But that exception on subsistence use raises a slightlymore problematic issue: what is the non-commercialvalue of the environment? What is the nonuse value ofnatural resources?



ITable 3.1 Visual Aids Used in Survey

ORDER OF ITEM DESCRIPTION1 I PRESENTATION

1 Show Card 1 Question A-1: List of Answer Categories 1-5



4 Photograph 1 Map 1 - State Of Alaska

5 Photograph 2 Map 2 - Prince William Sound

6 Photograph 3 Photograph A - Port Of Valdez And Valdez Narrows

7 Photograph 4 Photograph B -Columbia Glacier On Prince William Sound

ACE 10917166



Some mention that it won't protect any other part of the country except the area around Prince William Sound.

Some say that if they pay for this program they would have less money to use for other things that are more important to them.

And some say the money they would have to pay for the program is more than they can afford.

Question A-15 used a discretechoice elicitation format in the context of a referendum

model to ask whether the respondent would vote for the program if it cost a specified amount

that would be paid by a one-time federal tax payment. In order to obtain responses to a range

of amounts, four different versions (A through D) of the instrument were administered by the

interviewers to equivalent subsamples. Each version used a different set of dollar amounts in

questions A-15 to A-17, each set consisting of a single initial amount and two follow-up

amounts. Every respondent who said they would vote for the program at the initial amount was

asked whether they would also vote for the program if the cost to their household was a

specified second amount higher than the initial amount. Those who said they would not vote

for the program at the initial amount and those who were unsure were asked whether they would

vote for the program if it cost a specified second amount lower than the initial amount.

A-1 5. Of course whether people would vote for or against the escort ship program depends on how much it will cost their household.

A t present, government officials estimate the program will cost y ~ ~ lhousehold a total of $[specified amount here]. You would pay this in a special one time chargo in addition to your regular federal taxes. This money would Q& be used tor the program to prevent damage from another large oil spill in Prince William Sound. (PAUSE)

If the program cost your household a total of $(amount) would you vote for the program or against it?

The interviewers received special instructions about how to ask the willingness-@pay

questions and how to handle respondent queries in a neutral manner. The following material

ACE 10917178 J. Parman (College of William & Mary) Regulation of Markets, Spring 2013 April 3, 2013 17 / 23

Contingent Valuation Survey Issues

Recommendations implemented in Exxon Valdez survey:

Rigorous probability sample with high response rate

In-person interviews

Discrete choice referendum format

Accurate, neutral description of program

Conservative design features

Checks on understanding and acceptance

Debriefing questions following referendum questions

Careful pretesting


Contingent Valuation Survey Issues

Key design features:

Binary discrete choice question reasked at different costs

Payment vehicles: higher taxes, higher oil prices, higherprices on a range of goods

Number of years for payments

Embedding (WTP and the presentation of alternatives)

Gauging respondent perceptual error


Contingent Valuation Survey Issues: Framing Choices

Consider how people would respond to these three differentquestions:

How much would you be willing to donate to prevent anoil spill?

How much would you be willing to donate to prevent anoil spill? Circle one: $0, $5, $10, more than $10.

How much would you be willing to donate to prevent anoil spill? Circle one: $0, $50, $100, more than $100.

How much would you be willing to donate to prevent anoil spill? Circle one: more than $100, $100, $50, $0.



Consider how people would respond to these three differentquestions:

Would you donate $10 to prevent an oil spill?

Would you vote for a $10 increase in your taxes toprevent an oil spill?

Should the government spend the equivalent of $10 percapita to prevent an oil spill?


Passive Value and Not-So-Passive Measurement

The Exxon Valdez case raises some fundamentalquestions about nonuse value

You are informing survey respondents about the PrinceWilliam Sound

The respondents then say that they would pay $60 intaxes to prevent a future accident from happening

So did the Valdez oil spill cause that consumer $60 inharm?

Does the answer depend on whether they had everheard of the Prince William Sound?

Leads to a bit of an observer effect


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