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Managing Pollution Risk through Emissions Trading

  • Ghosh, Gaurav

    ()

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Shortle, James

    ()

    (Department of Agricultural Economics and Rural Sociology)

We compare two tradable permit markets in their ability to meet a safety first environmental target at least cost when some polluters have stochastic, correlated, and non-measurable emissions. In both markets, the point source permit defines the allowable level of the observed (deterministic) point source pollution load. The permit for unobservable and stochastic nonpoint source pollution cannot be defined in this way. One market bases the nonpoint permit on expected nonpoint pollution and uses a trading ratio between the two pollution types to manage stochasticity. This model follows existing point-nonpoint markets for water quality trading. The second model defines the nonpoint permit as a multi-attribute good, where the attributes inform the market about the stochasticity of the underlying pollution load. The multi-attribute permit market is demonstrated to out-perform the trading ratio market. This result is an artifact of polluters directly pricing stochasticity in the former market but not in the latter, where stochasticity is only controllable under highly restrictive conditions.

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Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 1/2012.

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Length: 38 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:ris:fcnwpa:2012_001
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  1. Hennessy, David A. & Feng, Hongli, 2008. "When Should Uncertain Nonpoint Emissions Be Penalized in a Trading Program?," Staff General Research Papers 12868, Iowa State University, Department of Economics.
  2. Lichtenberg, Erik & Zilberman, David, 1988. "Efficient Regulation of Environmental Health Risks," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 167-78, February.
  3. Kampas, Athanasios & White, Ben, 2003. "Probabilistic programming for nitrate pollution control: Comparing different probabilistic constraint approximations," European Journal of Operational Research, Elsevier, vol. 147(1), pages 217-228, May.
  4. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  5. Cynthia Morgan & Ann Wolverton, 2005. "Water Quality Trading in the United States," NCEE Working Paper Series 200507, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Jun 2005.
  6. Richard D. Horan, 2001. "Differences in Social and Public Risk Perceptions and Conflicting Impacts on Point/Nonpoint Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 934-941.
  7. A. Ellerman, 2005. "A Note on Tradeable Permits," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 123-131, 06.
  8. Tom Tietenberg, 2003. "The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 400-419.
  9. Tietenberg, T H, 1990. "Economic Instruments for Environmental Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 17-33, Spring.
  10. Graff Zivin, Joshua & Small, Arthur A., 2003. "Risk sharing in Coasean contracts," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 394-415, March.
  11. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
  12. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  13. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September.
  14. Shortle, James S., 1987. "Allocative Implications Of Comparisons Between The Marginal Costs Of Point And Nonpoint Source Pollution Abatement," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 16(1), April.
  15. Beavis, Brian & Walker, Martin, 1983. "Achieving environmental standards with stochastic discharges," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 103-111, June.
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