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Permits or Green Taxes/Subsidies? James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Institute at Hartford Hartford, Connecticut, USA Stodder, Presentation on Pollution Permits, Sept. 14, 2011

Tradable Pollution Permits or Green Taxes/Subsidies?

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Tradable Pollution Permits or Green Taxes/Subsidies?. James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Institute at Hartford Hartford, Connecticut, USA. CO 2 and Temperature Change. - PowerPoint PPT Presentation

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Page 1: Tradable Pollution Permits or Green  Taxes/Subsidies?

Tradable Pollution Permitsor

Green Taxes/Subsidies?

James Stodder, (Ph.D., Economics, Yale 1990)Lally School of Management & Technology

Rensselaer Polytechnic Institute at HartfordHartford, Connecticut, USA

Stodder, Presentation on Pollution Permits, Sept. 14, 2011

Page 2: Tradable Pollution Permits or Green  Taxes/Subsidies?

CO2 and Temperature Change

http://www.ngdc.noaa.gov/paleo/icecore/antarctica/vostok/vostok_data.html Stodder, Pollution Permits, Sept. 14, 2011 2

Page 3: Tradable Pollution Permits or Green  Taxes/Subsidies?

CO2 and Industrialization

http://www.globalwarmingart.com/wiki/Image:Carbon_Dioxide_400kyr.png

3Stodder, Pollution Permits, Sept. 14, 2011

Page 4: Tradable Pollution Permits or Green  Taxes/Subsidies?

Surface Temp & Hurricane Intensity

“Increasing destructiveness of tropical cyclones over the past 30 years”, Nature, 8/4/05, ftp://texmex.mit.edu/pub/emanuel/PAPERS/NATURE03906.pdf

Hurricane Intensity - - -

Sept. Surface Temp __

4Stodder, Pollution Permits, Sept. 14, 2011

Page 5: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 5

Majority Believes in Global Warming

Source: Yale University Project on Climate Change Communication

Page 6: Tradable Pollution Permits or Green  Taxes/Subsidies?

Good Old Supply & Demand!

Stodder, Pollution Permits, Sept. 14, 2011 6

Page 7: Tradable Pollution Permits or Green  Taxes/Subsidies?

Planning is Perfect – if No Uncertainty!

Stodder, Pollution Permits, Sept. 14, 2011 7

Page 8: Tradable Pollution Permits or Green  Taxes/Subsidies?

But if Costs are Uncertain …

Stodder, Pollution Permits, Sept. 14, 2011 8

Page 9: Tradable Pollution Permits or Green  Taxes/Subsidies?

… Outcome with Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 9

Page 10: Tradable Pollution Permits or Green  Taxes/Subsidies?

Losses with Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 10

Page 11: Tradable Pollution Permits or Green  Taxes/Subsidies?

Losses with Quantity Controls

Stodder, Pollution Permits, Sept. 14, 2011 11

Page 12: Tradable Pollution Permits or Green  Taxes/Subsidies?

With Cost Controls, further from Equ.

Stodder, Pollution Permits, Sept. 14, 2011 12

Page 13: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 13

Greater Losses with Cost Controls

Page 15: Tradable Pollution Permits or Green  Taxes/Subsidies?

What if more Gradual Define in Benefits?

Stodder, Pollution Permits, Sept. 14, 2011 15

Page 16: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 16

Quantity or Cost Controls?

Page 17: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 17

Cost Controls Closer to Equilibrium

Page 18: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 18

Quantity Controls Further from Equilibrium

Page 19: Tradable Pollution Permits or Green  Taxes/Subsidies?

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Costs more steeply sloped than Benefits => Cost Controls

Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf

Page 20: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 20

Best Method is an Empirical Question:

If Social Benefits are Less Price Sensitive (More Steeply Sloped) than Costs =>

Use Quantity Controls(Pollution Permits).

Page 21: Tradable Pollution Permits or Green  Taxes/Subsidies?

21Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf

Benefits more steeply sloped than Costs=> Quantity Controls

Page 22: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 22

If Social Benefits are More Price Sensitive(Less Steeply Sloped) than Costs =>

Use Cost Controls (Taxes / Subsidies).

Page 23: Tradable Pollution Permits or Green  Taxes/Subsidies?

23

Costs more steeply sloped than Benefits => Cost Controls

Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf

Page 25: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 25

Basic Business Argument:

What is more important for your Business?• Knowing the future price of energy that your

business must pay?

or …

• Knowing the future quantity of energy that the country as a whole must use?

Page 26: Tradable Pollution Permits or Green  Taxes/Subsidies?

Stodder, Pollution Permits, Sept. 14, 2011 26

Additional Arguments:

• Carbon taxes will make the cost of carbon-based energy higher, but also more stable.

• Taxes on energy are already in place. Pollution Permits would require new levels of bureaucracy.

• Much easier to tax oil at the refinery than check pollution permits at the tail pipe or smokestack.

• Carbon tax applies to all users, while permits are monitored for just the biggest polluters.

Page 28: Tradable Pollution Permits or Green  Taxes/Subsidies?

Bond Market Worried About Growth

28http://research.stlouisfed.org/fred2/graph/?id=FII10,