GPP 501 Microeconomic Analysis for Public Policy Fall 2017 Given - - PowerPoint PPT Presentation

GPP501: Lecture Oct 25 1 of 29

GPP 501 Microeconomic Analysis for Public Policy Fall 2017

Given by Kevin Milligan Vancouver School of Economics University of British Columbia Lecture October 25th Externalities: Carbon Pricing

GPP501: Lecture Oct 25 2 of 29

An ongoing Initiative: Ecofiscal Commission

 5-year limited-term thinktank.  Focused on pricing externalities.  Brings together diverse group of economists and former politicians.

http://youtu.be/RBNPHv0R-aw

GPP501: Lecture Oct 25 3 of 29

2 4 6 8 10 12 14 16 18 TUR SVN ISR KOR NLD CHL IRL ZAF EST DNK CZE CHN HUN GBR FIN ITA PRT CHE POL SVK LUX ISL AUT DEU SWE NOR BEL ESP FRA NZL CAN USA Percentage

Environment taxes as % of total tax revenue 2012

Source: OECD http://stats.oecd.org

GPP501: Lecture Oct 25 4 of 29

Agenda

• 1. Double Dividend Debate.
• 2. Cap and Trade vs Carbon Pricing.
• 3. Canada’s carbon plan

GPP501: Lecture Oct 25 5 of 29

The Double Dividend Debate

Several of the methods of externality abatement led, incidentally, to revenue  Pigouvian tax: government gets tax revenue.  Sale of tradeable permits: government gets sale revenue.

GPP501: Lecture Oct 25 6 of 29

The Double Dividend Debate

Here’s the double dividend claim:  We have less pollution: that’s a dividend!  We get some extra revenue we can use to lower other taxes: that’s a dividend!

• Alternative: we can use extra revenue to spend in other areas: that’s a

dividend!

GPP501: Lecture Oct 25 7 of 29

But…

Putting a tax on something is effectively a tax on consumption. This increases the ‘real’ price of consumption, so implicitly acts as a tax on labour.  At best, lowering taxes could totally counteract this impact.  But if you don’t exactly lower the right taxes, you’re not going to have your full dividend. Here’s some terminology:  Revenue recycling effect: impact of lowering taxes  Tax interaction effect: cost of pollution tax interacting with other (e.g. labour ) taxes. So, the revenue recycling effect can deliver a tax cut that makes the individual as well off as before the carbon tax, but the tax interaction effect eats up some of that gain—especially as carbon tax gets big.

GPP501: Lecture Oct 25 8 of 29

Agenda

• 1. Double Dividend Debate.
• 2. Cap and Trade vs Carbon Pricing.
• 3. Canada’s carbon plan

GPP501: Lecture Oct 25 9 of 29

The Weitzman model

Should we focus on prices or quantities?  Martin Weitzman in 1974 argued it depended on uncertainty about the cost and benefit curves.  Abatement cost curve slopes up with amount of abatement.  Benefit curve slopes down with the amount of abatement.  Also depends on slopes of the two curves.  Let’s check out why…

GPP501: Lecture Oct 25 10 of 29

The Weitzman model

 E is for expected; R is for realized.  Set tax and quantity at t* and a*, where expected MB=MC.  With cost uncertainty, tax leads to loss of triangle ABC; quantity regulation to loss

• f CDE.

 Which is better depends on slopes of MC and MB.  With benefit uncertainty, we lose ABC either way.

GPP501: Lecture Oct 25 11 of 29

Comparing carbon taxes and cap and trade:

Goulder and Schein (2013) compare what we know about carbon taxes and cap and trade Four ways that pricing and cap and trade the same: i. Incentives to reduce emissions: marginal incentives the same.

• ii. Compensation for distributional impacts: same options open to both.
• iii. Int’l competitiveness: border adjustments; mechanisms for subsidies to

some industries.

• iv. Offsets: either can handle them.

GPP501: Lecture Oct 25 12 of 29

Comparing carbon taxes and cap and trade:

Goulder and Schein (2013): Ways they are different: I. Admin costs: either can be admin’d upstream or downstream. But for CandT, you need to monitor emissions and who has the permits.

• II. Emissions price volatility: a win for carbon tax.
• III. Addressing uncertainty: quantity uncertainty is advantage to cap n trade.

Weitzman model evidence: Recent evidence suggests cost function is steeper; this supports carbon tax.

• IV. Interactions with other policies. For cap n trade, this affects the price of

the permits, so you don’t get any additional benefit from other policies.

• V. Monopoly power by producers could capture rent under cap and trade.
• VI. Revenue recycling easier under carbon tax: given US institutions.
• VII. Int’l linkages: they argue carbon tax easier.
• VIII. Lobbying / coverage: under carbon tax, industries lobby to be excluded.

Under CnT, they lobby for free permits within the system.

• IX. Political perceptions: who knows.

GPP501: Lecture Oct 25 13 of 29

Agenda

• 1. Double Dividend Debate.
• 2. Cap and Trade vs Carbon Pricing.
• 3. Canada’s carbon plan

GPP501: Lecture Oct 25 14 of 29

Federal carbon price floor:

https://www.canada.ca/en/environment-climate- change/news/2017/05/pricing_carbon_pollutionincanadahowitwillwork.html

Agreement between federal/provs/territories in December 2016.  MB and SK didn’t agree…. http://www.cbc.ca/news/politics/trudeau- premiers-climate-deal-1.3888244 Features:  Minimum $10/tonne in 2018; +$10 a year until reaching $50 in 2022.  Either carbon tax or a cap and trade.  P-T’s can use revenue as they like.  Feds will impose a price if province has no system: the backstop. Advantages:  Lets provinces design programs that fit their needs: e.g. heavy carbon intensity of exports in some places; not in others.  Revenues mostly stay in the province where taxes are raised.  Disadvantages/challenges coming up…

GPP501: Lecture Oct 25 15 of 29

Federal carbon price floor: Rates

GPP501: Lecture Oct 25 16 of 29

Federal carbon price floor: Challenges

How to crosswalk between cap and trade and carbon price.  Average price?  Coverage / stringency Designing the federal backstop.  A plan released in July: https://www.canada.ca/en/services/environment/weather/climatechange/tech nical-paper-federal-carbon-pricing-backstop.html  Looks a lot like Alberta’s… Accounting for other initiatives.  Saskatchewan carbon capture and storage.  Newfoundland and Labrador major gas tax hike in 2016: 18.65 cents/litre

• Equivalent to $80/tonne!

GPP501: Lecture Oct 25 17 of 29

Federal carbon price floor: All the links

GoC Federal backstop https://www.canada.ca/en/services/environment/weather/climatechange/tech nical-paper-federal-carbon-pricing-backstop.html BC carbon tax http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm AB carbon tax https://www.alberta.ca/climate-carbon-pricing.aspx SK Fed backstop https://globalnews.ca/news/3462367/sask-premier-describes-federal-carbon- tax-plan-as-a-ransom-note/ MB Carbon tax? http://www.gov.mb.ca/climateandgreenplan/index.html ON Cap and trade https://www.ontario.ca/page/cap-and-trade QC Cap and trade http://www.mddelcc.gouv.qc.ca/changements/carbone/Systeme- plafonnement-droits-GES-en.htm NB TBA http://www.ctvnews.ca/canada/gallant-says-new-brunswick-to-have-carbon- pricing-that-respects-economy-1.3646656 NS Cap and trade https://climatechange.novascotia.ca/proposed-cap-and-trade-program PE Carbon tax? http://www.theguardian.pe.ca/news/local/regional-carbon-tax-a- consideration-pei-environment-minister-101087/ NL Working on it… http://www.thetelegram.com/business/details-sparse-on-nl-offshore-carbon- pricing-plans-133640/ YT Federal backstop http://www.gov.yk.ca/news/17-166.html NT Studying… http://www.fin.gov.nt.ca/carbon-pricing NU ? http://www.gov.nu.ca/eia/news/pan-canadian-climate-change-strategy

GPP501: Lecture Oct 25 18 of 29

BC Carbon Tax:

http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm

In 2008, British Columbia instituted a carbon tax:  Applies to carbon in all forms—coal, heating oil, gasoline, industrial/residential.  Rate has moved from $10/tonne in 2008 to $30/tonne since 2012.  $30/tonne is 6.7 cents/litre of gas  Part 2 of Carbon Tax Act:

• Revenues used to lower personal and corporate income taxes—BC has

lowest rates in Canada now.

• Annual Carbon Tax Report in budget.

 Revenue is C$1.2B out of BC’s C$50B budget; or about 0.5% of GDP. New GreeNDP developments….  Carbon tax going to $35/tonne on April 1, 2018. 4 x annual $5 increases.  Repeal of Part 2 of Carbon Tax Act:

• Plan to spend the money; not return as tax cuts.

GPP501: Lecture Oct 25 19 of 29

BC Carbon Tax: Carbon Tax Report

GPP501: Lecture Oct 25 20 of 29

Alberta Carbon Levy and Rebate:

https://www.alberta.ca/climate-carbon-pricing.aspx

Alberta already had a carbon tax!  Specified Gas Emitters Regulation.  Affected big industrial emitters; had several different rates; not comprehensive or consistent. Alberta started carbon tax Jan. 1, 2017 @ $20tonne. $30/tonne in 2018. Direct rebates to households:  $200/adult; $100/spouse; $30/child.  Phased out with income (like child benefits or GST credit)  Threshold at $47500 for singles; $95K for 2+ person households. Alberta challenge: carbon intensive exports.  Output based allocations (OBAs).  Charges regular carbon tax on carbon used in production…but…  Gives a refund for each unit of output.

GPP501: Lecture Oct 25 21 of 29

Alberta: Output Based Allocations

https://www.alberta.ca/output-based-allocation-engagement.aspx Motivation: if other places don’t have carbon tax, exports put at disadvantage. Question: If firms get a cheque back for each barrel of oil produced, how does this lead to lower carbon use? (Hint: think about marginal production incentives…)

GPP501: Lecture Oct 25 22 of 29

Alberta: Carbon efficiency across sites

GPP501: Lecture Oct 25 23 of 29

Alberta: Will this work?

GPP501: Lecture Oct 25 24 of 29

Ontario Cap and Trade:

https://www.ontario.ca/page/cap-and-trade

Part of the Western Climate Initiative with California, Quebec. http://www.wci-inc.org/ Focuses on producers, not consumers. You have to register if:  Electricity importer.  If you emit 25K tonnes or more per year.  If you sell more than 200 litres of fuel a year. Registered producers need to buy permits in auctions run by WCI.  Held four times a year.  You submit a bid—the most you are willing to pay.  Bids are ordered from highest to lowest.  Start at the top and work down until you run out of permits.  The price of the last permit is the price everyone pays.

GPP501: Lecture Oct 25 25 of 29

Ontario Cap and Trade: Auction Results

https://www.ontario.ca/page/september-2017-auction-3-auction-summary- results-report

GPP501: Lecture Oct 25 26 of 29

Ontario Cap and Trade: Auction Results

GPP501: Lecture Oct 25 27 of 29

Ontario Cap and Trade: Auction Results

GPP501: Lecture Oct 25 28 of 29

Summary:

For emissions taxes, we have gone from a professor’s idea (Pigou) to application in about 100 years. On cap and trade, we have gone from a professor’s idea (Dales) to practical application in about 50 years. For carbon, will this work? We will see. But we know a lot more now about using price mechanisms to regulate externalities—and that has applications well beyond carbon.

GPP501: Lecture Oct 25 29 of 29

For next time:

Policy Memo due October 31st. Note: Next policy memo will be due on November 14th. We will start on public goods on Tuesday the 31st. Have a look at this overview by Tyler Cowen: http://www.econlib.org/library/Enc/PublicGoods.html