Emissions pricing

Climate change is caused by greenhouse gas (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 Sir 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 – putting a price tag on emissions – has been for long advocated by economists as an efficient means to address this problem. However, putting emission pricing into practice has turned out to be difficult. The purpose of this class is to understand why.

This class provides a comprehensive overview of the theory and, more important, the political practice of pricing emissions. This is an advanced course that provides a deep-dive in 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 rational of pricing emissions. The rest of the class will focus on topics and issues that have turned out to be crucial in the implementation of real-world emission 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 to implement 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 some other of the successful and less successful approaches to emission pricing, including the U.S. SOX and NOx emissiontrading schemes, and GHG gas cap and trade schemes in California, China and British Colombia.