Tuesday, April 20, 2010

On the independence and attractiveness of cap-and-trade

Interesting little review of emissions cap-and-trade schemes by Robert Hahn, the unfortunately titled Tesco Professor of Economics at the University of Manchester, and Robert Stavins of Harvard.

The concentrate on the 'independence property' of such schemes, which allows issues of equity and efficiency to be separated for policy-makers - basically, if it holds, it doesn't matter too much how permits are initially allocated. Half of the eight schemes they analyse seem to have that property.

They conclude:
The fact that the independence property is broadly validated provides support for the efficacy of past political judgments regarding constituency-building through legislatures’ allowance allocations in cap-and-trade systems. Repeatedly, governments have set the overall emissions cap and then left it up to the political process to allocate the available number of allowances among sources to build support for an initiative without reducing the system’s environmental performance or driving up its cost. This success with environmental cap-and-trade systems should be contrasted with many other public policy proposals for which the normal course of events is that the political bargaining that is necessary to develop support reduces the effectiveness of the policy or drives up its overall costs.

I'm not clear how much this can be extended to the large international carbon-trading schemes, though. Other studies have shown that cap-and-trade schemes need to be relatively small-scale and limited in scope to be efficient. And the problem with the big schemes hasn't been the allocation of a strictly controlled number of permits, but that the number hasn't been controlled effectively.

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