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Managing Pollution Risk through Emissions Trading

Author

Listed:
  • Ghosh, Gaurav

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

  • Shortle, James

    () (Department of Agricultural Economics and Rural Sociology)

Abstract

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.

Suggested Citation

  • Ghosh, Gaurav & Shortle, James, 2012. "Managing Pollution Risk through Emissions Trading," FCN Working Papers 1/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  • Handle: RePEc:ris:fcnwpa:2012_001
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    References listed on IDEAS

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    1. David A. Hennessy & Hongli Feng, 2008. "When Should Uncertain Nonpoint Emissions Be Penalized in a Trading Program?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(1), pages 249-255.
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    Citations

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    Cited by:

    1. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Shortle, James, 2013. "Economics and Environmental Markets: Lessons from Water-Quality Trading," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 42(1), April.
    4. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    5. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
    6. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

    More about this item

    Keywords

    Emissions trading; Environmental policy; Market design; Nonpoint pollution; Water Quality;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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