Emissions pricing

The importance of emissions pricing:

Climate change is caused by greenhouse gases (carbon dioxide, methane, and others) being emitted into the atmosphere. The fact that the emitters are not charged is "the greatest market failure that the world has seen", as Lord Nicholas Stern put it. In addition, emissions of local pollutants (SOX,NOx, particular matter) rank high on the list of most pressing policy problems in many parts of the world, in particular in many of the megacities in fast-growing developing and emerging economies. While the consequences of the two classes of emissions are different - global long-term climate change vs. local health impacts - the solution might be the same: incentives-based regulation, or putting a price tag on emissions, has long been advocated by economists as an efficient means to address this problem. However, putting emissions pricing into practice has proven out to be difficult. The purpose of this class is to understand why.

Learning objectives:

This class provides a comprehensive overview of the theory and, more importantly, the political practice of pricing emissions. This is an advanced course that provides a deep-dive into a narrow, but technical and complex topic. The objective of this class is to equip students with the theoretical and empirical understanding needed to implement carbon pricing schemes in practice.


The class starts with two sessions on the environmental economics theory and rationale of pricing emissions. The rest of the class will focus on topics and issues that have become crucial in the implementation of real-world emissions pricing schemes: the intertemporal nature of trading schemes, the political economy of initial allowance allocation, international and inter-sectoral carbon leakage, and the (im)possibility of implementing sensible national emission policies for countries that are part of international trading systems. The focal point of these discussions will be the largest trading scheme in the world: the EU Emission Trading Scheme for greenhouse gases. In the second half of the course, we will study other successful and less successful approaches to emissions pricing, including the U.S. SOX and NOx emission trading schemes, and the GHG gas cap and trade schemes in California, China and British Colombia.

This course is for 2nd year MIA and MPP students only.