Market design for the environment, by Cantillon and Slechten

 Here's a recent NBER working paper, to start the year off on an optimistic note:

MARKET DESIGN FOR THE ENVIRONMENT, by Estelle Cantillon and Aurélie Slechten, NBER Working Paper 31987, http://www.nber.org/papers/w31987

Abstract: The main argument in favor of markets in environmental contexts is the same as in other contexts: their ability to promote efficient allocations and production. But environmental problems bring their own challenges: their underlying bio-physical processes - and the technologies to monitor them - constrain what is feasible or even desirable. This chapter illustrates the main design dimensions in environmental markets, the trade-offs involved and their impact on performance, through the lens of a regulated market for pollution rights (the EU emissions trading scheme) and a voluntary market for the provision of environmental services (the global market for carbon credits). While both markets eventually contribute to climate change mitigation, their organisation as a “pollution market”, for the former, and as a “provision market”, for second, means that different design considerations take precedence. Both markets also face challenges: volatile prices in the EU emissions scheme and low trust for voluntary carbon markets. We discuss how alternative design options could address those.

From the Introduction:

"This chapter reviews existing and developing uses of markets for natural capital from a market design perspective. We first provide a typology of environmental problems for which markets can provide a solution. This leads us to distinguish between overexploitation, degradation and underprovision problems. Overexploitation and degradation problems happen when the goods and services provided by Nature are not excludable and property rights are shared or nonexistent. Underprovision problems arise when the natural resource, over which well-established access and usage rights exist, creates positive externalities for agents who do not benefit from any property rights to the resource. We argue that each natural resource is characterized by its specific bio-physical process which constrains the definition of what can be traded and the choice of design to support the goals of the market.

"We illustrate these considerations in the context of climate change mitigation, where compliance markets for emissions reduction and voluntary carbon markets are playing an increasingly important role. The history of the EU emissions trading scheme over the past 20 years illustrates how apparently small design decisions can impact the performance of a market and the challenges of generating an informative and stable price signal, an important desideratum to foster cost efficiency. The current discussions around the integrity of voluntary carbon markets show the importance of the definition of what is traded, and how technology and nature constrain it."

Repugnance towards carbon emissions trading

Here's a report of an experiment motivated by a desire to understand the repugnance felt in some quarters towards emissions trading as a way to reduce greenhouse gas emissions and other pollutants.

Clean up your own mess: An experimental study of moral responsibility and efficiency
Michael Jakob, DorotheaKübler, Jan ChristophSteckel, and Roelvan Veldhuizen
Journal of Public Economics, 155, November 2017,  138-146

It begins with a gripping account of some of this repugnance (which it uses to motivate an experiment of a more abstract sort):

"emissions trading schemes, have repeatedly faced criticism from various sides. In economics, such criticism has pointed out that emissions trading schemes are likely to face real-world constraints (e.g. related to monitoring requirements and the definition of baselines on how emissions would evolve in the absence of the scheme) that may lower their environmental effectiveness (Wara, 2007; Schneider and Kollmuss, 2015) and economic efficiency (Michaelowa and Jotzo, 2005; Krey, 2005). More fundamental criticisms have been raised by philosophers, climate scientists, environmental activists, and the Church (see for example Caney, 2010 and Page, 2011 for discussions of such criticisms). These types of criticisms often rely on a moral critique equating the trading of emission permits with the medieval practice of paying money to be cleared from one's sins, as put succinctly in the Earth Island Journal (Smith, 2009):

‘Congress's new cap-and-trade scam would put the Church's indulgence scheme to shame.’

In his book ‘Storms of my Grandchildren’, the prominent climate scientist Hansen (2010) expresses a similar concern:

‘A successful new policy cannot include any offsets.[i.e., emissions trading] […] The public must be firm and unwavering in demanding “no offsets”, because this sort of monkey business is exactly the type of thing that politicians love and will try to keep. Offsets are like the indulgences that were sold by the church in the Middle Ages’.

A related argument sees carbon offsets that are used to compensate for greenhouse gas emissions as a way to ease one's conscience without changing behavior. As George Monbiot (2006) writes in “The Guardian”:

‘Our guilty consciences appeased, we continue to fill up our SUVs and fly round the world without the least concern about our impact on the planet … it's like pushing the food around on your plate to create the impression that you have eaten it’.

The Catholic Church has also taken a critical stance on emissions trading, most notably in Francis's (2015) widely discussed encyclical ‘Laudato Si’:

‘The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors’. (Para. 171)

These statements capture the two types of criticisms of emissions trading established by Page (2011). First, emissions trading may fail to bring about long-term behavioral change required for successful climate change mitigation and undermine intrinsic incentives for environmentally friendly behavior. Second, it may violate non-consequential objectives of justice and fairness (see also Caney, 2010).

Hence, there appears to be a strong presumption that monetarily compensating for an environmental externality is not morally equivalent to changing one's behavior to avoid the externality, even if both courses of action result in identical outcomes. This raises the question of why people object to such compensation-based mechanisms. In this study, we hypothesize that people may have a preference to ‘clean up their own mess,’ that is, prefer to personally eliminate environmental externalities they are responsible for."

The NY Times on market approaches to reducing greenhouse gases

This graphic is from A Price Tag on Carbon as a Climate Rescue Plan, May 30.

How a Carbon Market Works

Governments around the world are experimenting with issuing permits that allow industries to emit carbon dioxide and other greenhouse gases, then restricting those permits to rein in carbon emissions.

CAP

CAP LOWERED

Purchased or

traded permits

Carbon

dioxide

emissions

Carbon

permits

Remaining

carbon

permits

Freely issued permits

CAPPED INDUSTRIES

INDUSTRY A

INDUSTRY B

CAPPED INDUSTRIES

CAP AND PERMIT

The government imposes a cap on the total amount of greenhouse emissions allowed from major industries, then issues permits to match the amount of the cap. Each permit allows the emission of one ton of carbon dioxide, or equivalent.

ISSUE, BUY AND TRADE

Initially, most of the permits are given to industries at no cost. The remaining permits can be bought at a government auction or traded in a carbon market set up for that purpose.

LOWERING THE CAP

The government gradually lowers the carbon cap by a few percent a year, which reduces the number of available permits and cuts the total amount of pollution allowed by the industries under the carbon cap.

No reduction

in emissions

Offset credits

Steep reduction

Investment

CARBON-REDUCING

PROJECT

INDUSTRY A

INDUSTRY B

INDUSTRY A

REDUCING TOTAL EMISSIONS

Industries can reduce their emissions by spending money to upgrade their facilities and equipment, or they can use the carbon market to purchase the carbon permits needed to cover their emissions — whichever is cheaper.

CARBON OFFSETS

Industries can also invest in projects elsewhere that lower carbon emissions, like forestry or burning methane from dairy cows. These projects create “offset credits” that can be used or sold, usually at a lower price than government-auctioned permits.

By The New York Times

Source: California’s Air Resources Board

Carbon emissions permits are cheap in Europe

The NY Times has the story: In Europe, Paid Permits for Pollution Are Fizzling

"More important, though, than lost jobs and diminished payouts for traders and bankers, the penny ante price of carbon credits means the market is not doing its job: pushing polluters to reduce carbon emissions, which most climate scientists believe contribute to global warming.

"The market for these credits, officially called European Union Allowances, or E.U.A.’s, has been both unstable and under sharp downward pressure this year because of a huge oversupply and a stream of bad political and economic news. On April 16, for instance, after the European Parliament voted down the proposed reduction in the number of credits, prices dropped about 50 percent, to 2.63 euros from nearly 5, in 10 minutes.

“No one was going to buy” on the way down, said Fred Payne, a trader with CF Partners.

"Europe’s troubled experience with carbon trading has also discouraged efforts to establish large-scale carbon trading systems in other countries, including the United States, although California and a group of Northeastern states have set up smaller regional markets.

"Traders do not mind big price swings in any market — in fact, they can make a lot of money if they play them right.

"But over time, the declining prices for the credits have sapped the European market of value, legitimacy and liquidity — the ease with which the allowances can be traded — making it less attractive for financial professionals."

Carbon trading down under

An ongoing carbon market in New Zealand and a proposed one in Australia...

The NZ ETS: carbon pricing in the neighbourhood, by Basil Sharp and Nan Jiang.
"Participants in the New Zealand ETS surrender emission units that match their annual emission levels. A New Zealand Unit (NZU) is the primary domestic unit of trade. To meet obligations under the scheme, participants can surrender free units, if they have any, at the rate of 1 for every 2 tonnes emitted. Otherwise, participants have to either pay the fixed price option, or purchase NZUs or other Kyoto compliant units."

***********

Australia Proposes Carbon Trading Plan, Again

"Prime Minister Julia Gillard of Australia announced a plan on Sunday that would tax the carbon dioxide emissions of the country’s 500 worst polluters and create the second-biggest emissions trading program in the world, after the European Union’s.
...
For the 500 companies — which would include mining giants with operations in Australia like BHP Billiton, Rio Tinto and Xstrata — the government has set a price of 23 Australian dollars, or $24.70, for each ton of carbon dioxide emitted starting July 1 of next year, rising 2.5 percent annually before shifting in 2015 to a market-driven trading program.

"A similar proposal by Ms. Gillard’s predecessor, Kevin Rudd, was largely blamed for having led to his political downfall."
...
"When the European Union initiated its carbon-trading program in 2005, many polluters passed on the cost of the free permits they were given to consumers, creating large corporate profits. That is unlikely to happen in Australia, said Mr. Jordan of Deutsche Bank.

“Australian policy makers learned the lesson from Europe that there’s a risk if you hand out too many free permits and you hand them out to the wrong sectors, that you get emitters both passing on the cost of carbon but also pocketing the value of those permits,” he said."

Carbon markets

The U.S. Dept. of Agriculture's Economic Research Service is running a conference today and tomorrow on the design of carbon markets: Carbon Market Design: Issues and Opportunities


Monday, January 31, 2011 Morning Session

9:00 a.m. Welcome remarks Kitty Smith, USDA, Economic Research Service, Administrator

9:10 a.m. Kickoff speaker Richard Sandor, Environmental Financial Products, Chairman and CEO; Chicago Climate Exchange, Founder

9:45 a.m. Carbon Markets Marketing, Jim Kharouf, Environmental Markets Newsletter, Editor

10:15 a.m. Lessons from Existing Environmental Markets for the Design of Climate Policy, Dallas Burtraw, Resources for the Future, Senior Fellow

10:45 a.m. Morning break (coffee and snacks)

11:00 a.m. Implementation of Regional Carbon Markets in the United States Jonathan Schrag, Regional Greenhouse Gas Initiative, Inc., Executive Director

11:30 a.m. The Role of Exchanges in Global Environmental Markets: Confidence, Stability, Transparency,Tom Lewis,Green Exchange, CEO

Afternoon Session

1:15 p.m. Moderating Price Volatility, Andrew Stocking, Congressional Budget Office, Analyst and Market Design Economist

1:45 p.m. Participation in the Carbon Market Albert S. “Pete” Kyle, University of Maryland, Robert H. Smith School of Business, Charles E. Smith Chair Professor of Finance

2:15 p.m. Discussion of Moderating Price Volatility and Participation in the Carbon Market Matthew Harding, Stanford University Department of Economics

2:30 p.m. Alternatives to Quantity-based Climate Policy, Peter Cramton, University of Maryland, Professor of Economics

3:00 p.m. Discussion of Alternatives to Quantity-based Climate Policy Henrik Hasselknippe, Green Exchange

Tuesday, February 1, 2011, Morning Session

9:00 a.m. Oil Prices and the Carbon Market, Perry Sadorsky, York University, Schulich School of Business, Associate Professor of Economics

9:30 a.m. Discussion of Oil Prices and the Carbon Market Nela Richardson, Commodity Futures Trading Commission

9:45 a.m. Agricultural Carbon Credits: Lessons Learned from the AgraGate Experience, Dave Miller
Iowa Farm Bureau, Research and Commodity Services, Director

10:15 a.m. Tradeoff Between Permits and Offsets, Adele Morris, Brookings Institution, Fellow

10:45 a.m. Discussion of Agricultural Carbon Credits: Lessons Learned from the AgraGate Experience and Tradeoff Between Permits and Offsets John Horowitz, Economic Research Service

11:00 a.m. Regulatory Perspective on Carbon Markets Eric Juzenas, Commodity Futures Trading Commission, Senior Counsel to the Chairman

European carbon markets suspended

The suspension of trading on European carbon emissions markets has been covered fairly widely, with the most interesting (and critical) story I've seen being this one from the Telegraph. European carbon market suspended over fraud fears: "The European carbon market has been thrown into turmoil after the scandal-hit scheme was suspended for a week over suspicions of fraud."


"More than €2bn (£1.7bn) of trade is likely to be disrupted after the European Commission said it would prevent transactions until January 26.
"The suspension follows allegations that 475,000 carbon credits worth €7m were stolen in a hacking attack on the Czech carbon register. It appears that the intangible allowances were bounced between eastern European countries before disappearing without a trace."
...

"This is not the first challenge to the credibility of the €90bn annual market in carbon allowances
"Under the flagship scheme, companies need permits to emit carbon dioxide as part of the global fight against climate change and polluters are granted a certain number of emissions allowances that can be traded.
"But it has been plagued by fraud, with Europol estimating that carbon trading criminals trying to play the system may have accounted for up to 90pc of all market activity in some European countries during 2009. Fraudulent traders mainly from Britain, France, Spain, Denmark and Holland pocketed an estimated €5bn. Carbon allowances are particularly susceptible to fraud because they are high value, intangible and easily moved between different countries."

The World Bank goes all in on carbon markets

The NY Times reports: World Bank Will Help Finance Carbon Markets

"As the United Nations climate change talks in Cancún lurch slowly toward an uncertain conclusion, the World Bank is stepping in to help developing countries set up pollution credit markets to help pay for clean development programs.

"Robert B. Zoellick, the World Bank president, will appear before delegates here on Wednesday to announce the creation of a multimillion-dollar program to create trading mechanisms to stimulate clean energy projects and to slow the destruction of tropical forests, one of the primary sources of global warming emissions. ...
...
"The list of countries that will take part in the carbon market initiative was not announced, but they are expected to include China, Mexico, Indonesia and Chile. Other countries are expected to join as more funds become available, bank officials said.

"The European Union already has a carbon market, known as the Emissions Trading System, which barters pollution credits for European industries for climate-friendly projects, mainly in the developing world. Legislation to create a similar national trading system in the United States stalled in Congress this year.

"Such programs are controversial because they have been at times poorly monitored and the price for carbon credits has fluctuated wildly. Many poorer nations also complain that their natural resources have been turned into commodities traded on exchanges in wealthy countries.

“Carbon markets are an irreparably flawed means of addressing climate change,” Karen Orenstein of the environmental group Friends of the Earth told Reuters. “They are unreliable and subject to fraud, and they open the door to offset loopholes that undermine environmental integrity.”

"The World Bank hopes to devote as much as $100 million to provide technical support and other aid to help developing countries establish carbon exchanges and other ways of raising private funds to help reduce emissions and adapt to climate changes."

Europe's first auction of carbon emissions permits

The London Times reports controversy about how the auction revenue should be spent:
Protests as carbon permits auction raises £54m
The Government has provoked anger by saying proceeds of sale will not necessarily be used to tackle climate change issues

"Yesterday's auction marked a departure from the policy of handing out the permits to industry for free."
...
"Campaigners said that the Treasury's decision to put the proceeds into its coffers rather than ringfencing them for use in environmental projects plays into the hands of critics, who fear that the ETS will be treated as little more than a green tax. "

I gather "ringfenced" is an antonym of "fungible."

Pollution permits: RGGI auction results

RGGI, Inc. reports on their first auction.

The WSJ environmental blog report, Capping Carbon: Northeast Utilities Pay to Pollute, But Does That Matter?, says that
"Six of the ten states in the scheme offered 12.5 million permits for power companies to pollute. Bidders actually wanted more than 50 million permits, a sign of serious interest among utilities in getting their hands on the permits. (And it was largely utilities that were bidding; organizers said power companies, rather than environmental groups or third-party traders, bought “most” of the allowances.)
But demand wasn’t strong enough to actually make the emissions permits expensive: The auction price of $3.07 a ton was a little bit above the minimum bid price of $1.86 a ton, and just below the $4-something figures bandied about ahead of the auction. In comparison, greenhouse-gas emissions permits in the European scheme are trading at about $37. "

A firm hired by RGGI to monitor the auction reports no problems. The report includes the following:
"Based on our monitoring of participant conduct in the auction, we find no
material evidence of collusion or manipulation by bidders. The vast majority of bids were submitted in line with competitive expectations."

Pollution permits: RGGI auction

The Regional Greenhouse Gas Inititative prepares to hold its first auction tomorrow: Emissions auction aims to be US model
Power plants in 10 states will bid on the right to pollute

"The first auction is really just a small release of allowances to the market for price discovery purposes," he said. "I think a lot of people will just be kind of testing the waters."

Here is the RGGI; auction results will be posted here. The auction will be a uniform price, sealed bid auction. A full set of documents is here.

Experiments played a role in the design process, see

Auction Design for Selling CO2 Emission Allowances Under the
Regional Greenhouse Gas Initiative
Final Report
October 26, 2007
Investigators:
Charles Holt, William Shobe
University of Virginia
Dallas Burtraw, Karen Palmer
Resources for the Future
Jacob Goeree
California Institute of Technology