Cameron Hepburn

Auctioning of EU ETS phase II allowances: how and why?

Abstract The European Directive on the EU ETS allows governments to auction up to 10% of the allowances issued in phase II 2008–2012, without constraints being specified thereafter. This article reviews and extends the long-standing debate about auctioning, in which economists have generally supported and industries opposed a greater use of auctioning. The article clarifies the key issues by reviewing six ‘traditional’ considerations, examines several credible options for auction design, and then proposes some new issues relevant to auctioning. It is concluded that greater auctioning in aggregate need not increase adverse competitiveness impacts, and could in some respects alleviate them, particularly by supporting border-tax adjustments. Auctioning within the 10% limit might also be used to dampen price volatility during 2008–2012 and, in subsequent periods, it offers the prospect of supporting a long-term price signal to aid investor confidence. The former is only possible, however, if Member States are willing to coordinate their decision-making (though not revenue-raising) powers in defining and implementing the intended pricing mechanisms.

The impact of CO2 emissions trading on firm profits and market prices

Abstract The introduction of mandatory controls and a trading scheme covering approximately half of all carbon dioxide emissions across Europe has triggered a debate about the impact of emissions trading on the competitiveness of European industry. Economic theory suggests that, in many sectors, businesses will pass on costs to customers and make net profits due to the impact on product prices combined with the extensive free allocations of allowances. This study applies the Cournot representation of an oligopoly market to five energy-intensive sectors: cement, newsprint, steel, aluminium and petroleum. By populating the model with empirical data, the results are shown for three future emissions price scenarios. The results encompass the extent of cost pass-through to customers, changes in output, changes in UK market share, and changes in firm profits. The results suggest that most participating sectors would be expected to profit in general, although with a modest loss of market share in the case of steel and cement, and closure in the case of aluminium.

Combining Multiple Climate Policy Instruments: How Not to Do It

Putting a price on carbon is critical for climate change policy. Increasingly, policymakers combine multiple policy tools to achieve this, for example by complementing cap-and-trade schemes with a carbon tax, or with a feed-in tariff. Often, the motivation for doing so is to limit undesirable fluctuations in the carbon price, either from rising too high or falling too low. This paper reviews the implications for the carbon price of combining cap-and-trade with other policy instruments. We find that price intervention may not always have the desired effect. Simply adding a carbon tax to an existing cap-and-trade system reduces the carbon price in the market to such an extent that the overall price signal (tax plus carbon price) may remain unchanged. Generous feed-in tariffs or renewable energy obligations within a capped area have the same effect: they undermine the carbon price in the rest of the trading regime, likely increasing costs without reducing emissions. Policymakers wishing to support carbon prices should turn to hybrid instruments — that is, trading schemes with price-like features, such as an auction reserve price — to make sure their objectives are met.

Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change

Arguments about the appropriate discount rate often start by assuming a Utilitarian social welfare function with isoelastic utility, in which the consumption discount rate is a function of the (constant) elasticity of marginal utility along with the (much discussed) utility discount rate. In this model, the elasticity of marginal utility simultaneously reflects preferences for intertemporal substitution, aversion to risk, and aversion to (spatial) inequality. While these three concepts are necessarily identical in the standard model, this need not be so: well-known models already enable risk to be separated from intertemporal substitution. Separating the three concepts might have important implications for the appropriate discount rate, and hence also for long-term policy. This paper investigates these issues in the context of climate-change economics, by surveying the attitudes of over 3000 people to risk, income inequality over space and income inequality over time. The results suggest that individuals do not see the three concepts as identical, and indeed that preferences over risk, inequality and time are only weakly correlated. As such, relying on empirical evidence of risk or inequality preferences may not necessarily be an appropriate guide to specifying the elasticity of intertemporal substitution.

Regret Theory and the Tyranny of Choice

As economists, we tend to accept the principle that more choice cannot make us worse off. However, recent evidence from laboratory and field experiments suggests that more choice can inhibit decision-making and reduce search in many situations, potentially reducing welfare. This paper provides a formal theoretical foundation for these observations by embedding the regret theory of Loomes and Sugden (1982) in three search models. Beyond a threshold number of options, we find that ‘less is more’: agents who experience regret have lower utility as the number of options is increased.

A stated preference investigation into the Chinese demand for farmed vs. wild bear bile.

Farming of animals and plants has recently been considered not merely as a more efficient and plentiful supply of their products but also as a means of protecting wild populations from that trade. Amongst these nascent farming products might be listed bear bile. Bear bile has been exploited by traditional Chinese medicinalists for millennia. Since the 1980s consumers have had the options of: illegal wild gall bladders, bile extracted from caged live bears or the acid synthesised chemically. Despite these alternatives bears continue to be harvested from the wild. In this paper we use stated preference techniques using a random sample of the Chinese population to estimate demand functions for wild bear bile with and without competition from farmed bear bile. We find a willingness to pay considerably more for wild bear bile than farmed. Wild bear bile has low own price elasticity and cross price elasticity with farmed bear bile. The ability of farmed bear bile to reduce demand for wild bear bile is at best limited and, at prevailing prices, may be close to zero or have the opposite effect. The demand functions estimated suggest that the own price elasticity of wild bear bile is lower when competing with farmed bear bile than when it is the only option available. This means that the incumbent product may actually sell more items at a higher price when competing than when alone in the market. This finding may be of broader interest to behavioural economists as we argue that one explanation may be that as product choice increases price has less impact on decision making. For the wildlife farming debate this indicates that at some prices the introduction of farmed competition might increase the demand for the wild product.

Carbon trading: unethical, unjust and ineffective?

Cap-and-trade systems for greenhouse gas emissions are an important part of the climate change policies of the EU, Japan, New Zealand, among others, as well as China (soon) and Australia (potentially). However, concerns have been raised on a variety of ethical grounds about the use of markets to reduce emissions. For example, some people worry that emissions trading allows the wealthy to evade their responsibilities. Others are concerned that it puts a price on the natural environment. Concerns have also been raised about the distributional justice of emissions trading. Finally, some commentators have questioned the actual effectiveness of emissions trading in reducing emissions. This paper considers these three categories of objections � ethics, justice and effectiveness � through the lens of moral philosophy and economics. It is concluded that only the objections based on distributional justice can be sustained. This points to reform of the carbon market system, rather than its elimination.

Nature in the balance : the economics of biodiversity

This book sets out the building blocks of an economic approach to biodiversity, and in particular brings together conceptual and empirical work on valuation, international agreements, the policy instruments, and the institutions. The objective is to provide a comprehensive overview of the issues and evidence, and to suggest how this very urgent problem should be addressed. Whilst there has been an enormous growth and research focus on climate change, less attention has been paid to biodiversity. This collection of high-quality chapters addresses the economic issues involved in biodiversity protection. This book focuses on the economics, but incorporates the underpinning science and philosophy, combining the application of a number of theoretical ideas with a series of policy cases. The authors are drawn from leading scholars in their specific areas of economics, philosophy, and conservation biology. Contributors to this volume - Paul R. Armsworth, University of Tennessee, Knoxville Giles Atkinson, London School of Economics and Political Science Edward B. Barbier, University of Wyoming Ian J. Bateman, University of East Anglia Joanne C. Burgess, University of Wyoming Salvatore Di Falco, University of Geneva Paul J. Ferraro, Georgia State University Ben Groom, London School of Economics and Political Science Kirk Hamilton, The World Bank Nick Hanley, University of Stirling Dieter Helm, University of Oxford Cameron Hepburn, London School of Economics and Political Science Kris Johnson, The Nature Conservancy Chris J. Kennedy, George Mason University Georgina M. Mace, University College London Charles F. Mason, University of Wyoming Dustin Miller, United Nations Environment Programme Daniela A. Miteva, Duke University Susana Mourato, London School of Economics and Political Science Charles Palmer, London School of Economics and Political Science Subhrendu K. Pattanayak, Duke University Grischa Perino, University of Hamburg Stephen Polasky, University of Minnesota Pavan Sukhdev, Yale University Timothy Swanson, Graduate Institute of International Studies, Geneva Kathy J. Willis, University of Oxford

Valuing the far-off future: discounting and its alternatives

Discounting has a central and controversial role in long-term policy evaluation: central because the result frequently turns upon the particular discount rate employed, and controversial because exponential discounting can generate recommendations that appear contrary to commonsense. This chapter reviews social discounting, addresses the arguments for and against a zero pure rate of time preference, outlines recent research suggesting that social discount rates should decline over time, and finally considers some alternatives to discounting in social decision-making.

Prove Paris was more than paper promises

Wishful thinking and bravado are eclipsing reality. Countries in the European Union are struggling to increase energy efficiency and renewable power to the levels that they claimed they would. Japan promised cuts in emissions to match those of its peers, but meeting the goals will cost more than the country is willing to pay. Even without Trumps attempts to roll back federal climate policy, the United States is shifting its economy to clean energy too slowly.