Andries Nentjes

Markets for Tradeable Emission and Ambient Permits: A Dynamic Approach

This paper discusses trade mechanisms in pollutionpermit markets. Proofs are given, that sequential,bilateral trade in tradeable emissions permitsconverges to a market equilibrium with minimal totalcosts of pollution control. If ambient or depositionpermits are traded, the convergence of bilateraltransactions occurs only in the case of a singlereceptor. For multiple receptors, the proof ofconvergence for tradeable emissions and ambientpermits is given for two trade mechanisms: sequential,multilateral trade and a Walrasian auction.

Organizational slack in subsidized nonprofit institutions

Informal objectives of managers next to the formal objective of the organization can be a source of organizational slack or X-inefficiency in nonprofit organizations. If the organization is subsidized the donor can restrain organizational slack by choosing an appropriate subsidy system. Four subsidy systems are discussed: output, input, revenue and lump sum subsidy. Output subsidy reduces slack most. The ranking of input subsidy compared with lump sum subsidy depends on the elasticity of demand for output. Revenue subsidy equals input subsidy. Changes in the subsidy regime for residential adult educations in the Netherlands turn out to have been inconsistent.

On the quality of compliance mechanisms in the Kyoto Protocol

Abstract In this paper we evaluate the compliance mechanisms in the Kyoto Protocol as agreed at the seventh Conference of Parties to the United Nations Framework Convention on Climate Change (UNFCCC) in Marrakech. We differ from the literature since we concentrate on the complete set of compliance rules agreed in Marrakech and, as a new element, we systematically discuss these compliance incentives in conjunction with the implicit compliance incentives: reputation protection, emission trading and banking. We conclude that effectiveness and efficiency go hand in hand for all explicit and implicit compliance incentives except one—emission trading. Trading improves efficiency but this can also occur at the cost of increasing non-compliance.

Competitive Distortions in EU Environmental Legislation: Inefficiency versus Inequity

In the European Union a number of emission standards for stationary sources have been harmonised. For many years the legal basis has been article 100 EEC (renumbered as article 94 by the Amsterdam Treaty), which calls for harmonisation to eliminate and prevent distortions of competition in the common market. In the paper, two views of ‘distortion of competition’ are distinguished: either as an inefficiency in the allocation of resources or as an inequity of starting conditions. At first sight, the inequity interpretation seems to have been the primary motive for harmonising source emission standards. However, a closer investigation reveals that actual harmonisation policies also partly reflect the ‘inefficiency’ view. Implicitly, the harmonisation policies of the EU may trade off efficiency and equity.

An essay on innovations for sustainable development

Abstract Ongoing environmental innovation is the only way to reduce pressures on environmental qualities while maintaining income growth. However, the views on how to initiate and foster environmental innovations differ. In the essay we discuss three theoretical approaches. From neo-classical economic theory we distill the message that research and development of new technology thrive on economic incentives. The evolutionary theory describes patterns in technological development but in our view it exaggerates the importance of technological interlinkages that cause lock-in, as barriers to environmental innovation and it overlooks the organisational impediments within the firm. From the behavioural theory of the firm we learn that innovations can only get through in situations of urgency. The conclusion is that a strict environmental policy can create the sense of urgency and strong incentives for environmental innovation. Ambitious and inflexible targets at macro-level but flexibility at micro-level of the firm are unsurpassable as a policy to foster environmental innovation.

Creating markets for air pollution control in Europe and the USA

This paper surveys recent efforts to relax the rigid regulatory frameworks for air pollution control in Europe and the USA. European policies have mainly taken the form of bubbles and compensation or offset schemes. Emission trading has been limited to intra-firm solutions for various reasons: industry structure, absence of real scarcity, and too restrictive trading rules. Bubbles have been granted to homogenous sectors only and can be characterized as direct regulation for a group rather than tradable permit systems. By contrast, the sulphur allowance program in the USA has laid down the foundation for a pollution permit market with few formal restrictions. Problems that arise are mainly related to local environmental and public utility controls. Europe can learn from the USA that regular national permit markets could be installed, preferably for homogenous sectors. In designing the permit system, the differences between the USA and Europe in terms of ecosystem sensitivity, stringency of regulation and differentiation of regional environmental policy have to be taken into account.

Voluntary Environmental Agreements: Lessons on Effectiveness, Efficiency and Spillover Potential

Voluntary agreements (VAs) have been widely used in environmental policymaking over the past 20 years. This paper reviews relevant theoretical and empirical literature on VAs, assessing their performance in terms of effectiveness and efficiency. Effectiveness is evaluated on three criteria: (i) effectiveness in setting the pollution abatement target, (ii) effectiveness in incentivising participation , and (iii) effectiveness in realizing the abatement target. Both static efficiency, in particular the allocation of abatement among participants in the VA, and dynamic efficiency, in particular the role of technology and informational spillovers, are evaluated. Finally, we identify gaps in the literature that provide opportunities for future research.

Tradable Permits versus Tradable Credits: A Survey and Analysis

This article compares tradable permits with tradable credits, two distinct economic instruments of environmental policy. It is demonstrated that under credit trading, which is an addition to (relative) emission standards, residual emissions are free of cost. Under permit trading (cap-and-trade), residual emissions always have a cost. The economic consequences of this difference are surveyed and analyzed with regard to various issues, including economic efficiency, political acceptance, incentives for adopting clean technologies, and incentives for legal compliance. The review concludes that permit trading is less costly to society than credit trading, but imperfect markets for output may change this ranking. The article reveals several gaps in the literature and formulates some new hypotheses for future research.

Control of reciprocal transboundary air pollution and Joint Implementation.

International conventions to protect the environment usually have the form of commitments to reduce emission on a reciprocal basis. This chapter analyzes the conditions under which a Pareto-efficient agreement to reduce emissions reciprocally can be improved by joint implementation. Joint implementation is conceived as a second phase in which obligations to reduce emissions, which were agreed upon in the first phase, are exchanged for money. The scope for reciprocal reduction of emissions and for joint implementation are discussed first for a case where each government cares for its national environment only, and next for the case where a government is also willing to pay for improvement of the environment abroad.

Inefficiencies in Public Environmental Services

The paper discusses efficiency issues in the public provision of environmental services, in particular waste water treatment. It is shown that in the face of increasing, respectively decreasing returns to scale the zero profit constraint of a cost minimizing public firm induces underinvestment, respectively overinvestment in public capacity compared with efficient allocation between public purification and effluent control by private polluters. X-inefficiency of the public firm counter-acts the inefficiency in allocation arising from overinvestment, and it reinforces the inefficiency in allocation in case of underinvestment in public purification capacity. As subsidy can bring down the users charge imposed on sources, but it will also increase X-inefficiency. The subsidy counteracts underinvestment but reinforces overinvestment in public capacity.