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Environmental Markets

Environmental Markets: Equity and Efficiency

Graciela Chichilnisky
Geoffrey Heal
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  • Book Info
    Environmental Markets
    Book Description:

    Markets are increasingly central to the resolution of environmental problems. They played a critical role in implementing the 1990 Clean Air Act of the United States, which has been instrumental in reducing acid rain in a cost-effective manner. They are also central to the global strategy adopted for limiting the emissions of greenhouse gases under the 1997 Kyoto Protocol and are being used for resolving conflicts over the use of other environmental resources, particularly water.

    Environmental Markets: Equity and Efficiency represents the first systematic and in-depth study of the economic issues raised by this growing use of environmental markets. Focusing on the relationship between equity and efficiency -- which is central to many of the debates between industrial and developing countries -- the book explores the underlying economics and the possibilities for win-win solutions that benefit all parties to the problems.

    Graciela Chichilnisky and Geoffrey Heal have been instrumental in developing the economic understanding required for the operation of environmental markets and for promoting their use among policy makers leading to the Kyoto Protocol. Contributors to this volume include established experts from international organizations, nongovernmental organizations, and academia, including Raúl Estrada-Oyuela, who chaired the negotiating committee of the Framework Convention on Climate Change and the 1997 Kyoto meetings.

    eISBN: 978-0-231-50447-8
    Subjects: Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-viii)
    Graciela Chichilnisky and Geoffrey Heal
  4. Chapter 1 Introduction
    (pp. 1-12)
    Graciela Chichilnisky and Geoffrey Heal

    Markets are among the oldest and most powerful of social institutions. They are a dominant force in the world economy today and in many ways a force for change and progress. Market economies have led the race for industrialization, overcoming planned economies and traditional agricultural societies during the course of the twentieth century. The most attractive feature of markets is the efficiency with which they allocate resources, requiring minimal intervention once an appropriate legal infrastructure is in place. This was Adam Smith’s vision of the “invisible hand” and was formalized in the neoclassical theory of competitive markets that has prevailed...

  5. Chapter 2 Markets for Tradable Carbon Dioxide Emission Quotas: Principles and Practice
    (pp. 13-45)
    Graciela Chichilnisky and Geoffrey Heal

    This chapter reviews a range of issues relating to tradable carbon dioxide (CO₂) emission quotas (TEQs). It considers the economic principles on which they are based, compares them with alternative carbon abatement policies, and reviews many aspects of how tradable quotas would be implemented in practice.

    Section 2.2 sets the scene, explaining why these issues are on the agenda and how they relate to current issues, such as joint implementation.

    The principal alternative to a TEQ regime is the adoption of carbon taxes. Section 2.3 compares salient aspects of the two policy approaches. It also analyzes how they can be...

  6. Chapter 3 Equity and Efficiency in Environmental Markets: Global Trade in Carbon Dioxide Emissions
    (pp. 46-67)
    Graciela Chichilnisky, Geoffrey Heal and David Starrett

    This chapter addresses a topical issue: the creation of a global market for carbon dioxide (CO₂) emission permits.¹ The recent adoption in the Kyoto Protocol of an ambitious target for global CO₂ emission has focused attention on policy instruments for achieving this goal. In addition, increasing awareness of the economic burden of environmental protection has produced an interest in market-based policy instruments that can minimize detailed government intervention. As a result markets for emission rights are today the approach of choice of the U.S. administration.²

    We show that a market for emission permits has an important characteristic not previously noted,...

  7. Chapter 4 Emissions Constraints, Emission Permits, and Marginal Abatement Costs
    (pp. 68-81)
    Geoffrey Heal

    Should the marginal cost of emission abatement be equalized across countries? Do markets for tradable emission permits lead to Pareto-efficient patterns of emission abatement? Until recently, the standard answers to both questions were yes. However, Chichilnisky [4] and then, in a more general context, Chichilnisky and Heal [5] proved that the efficient abatement of carbon dioxide (CO₂) emissions does not require the equalization of marginal abatement costs across countries. Equalization is required if and only if it is possible to make unrestricted and free lump-sum redistributions of wealth sufficient to equate the marginal social valuation of consumption in all countries....

  8. Chapter 5 Equilibrium and Efficiency: International Emission Permits Markets
    (pp. 82-109)
    Geoffrey Heal and Yun Lin

    Climate change poses potential serious problems for our global community. The Intergovernmental Panel on Climate Change (IPCC) [20] predicts that the global mean temperature will rise as much as 3°C above the present value before the end of the twenty-first century if the current trend of greenhouse gas emissions persists.¹ Global warming, experts believe, could cause severe detrimental economic and ecological effects, among them being decreases in agricultural productivity, more frequent storms, and alterations of ecological systems. Although uncertainties² still remain in terms of both scientific evidence of the greenhouse effect and the consequences of global warming, the scale, inertia,...

  9. Chapter 6 Efficiency Properties of a Constant-Ratio Mechanism for the Distribution of Tradable Emission Permits
    (pp. 110-125)
    Andrea Prat

    The world’s public opinion has been increasingly alarmed by the dangers posed by carbon dioxide (CO₂) emissions. The current level of emissions, if not curbed, could lead to relevant climate changes that might have disastrous effects on humanity. Chichilnisky [3] and Chichilnisky and Heal [4] offer a general review of the problem of CO₂ emissions. Such a complex issue can be analyzed from several viewpoints. This chapter focuses on the public good aspect. As CO₂ tends to distribute itself evenly in the atmosphere over time, in the long run it does not matter where on the earth’s surface CO₂ originates;...

  10. Chapter 7 Who Should Abate Carbon Emissions? An International Viewpoint
    (pp. 126-134)
    Graciela Chichilnisky and Geoffrey Heal

    The 1992 Earth Summit in Rio de Janeiro acknowledged the need for international cooperation in responding to the threat of climate change posed by the rapidly increasing concentration of carbon dioxide (CO₂) in the atmosphere. There are, however, substantial differences of opinion both about the main issues and about the framework for resolving them. Industrial countries typically focus on the potential problems posed by the growth of population in developing countries and on the environmental pressure from carbon emissions that this could create over the next half century. Abatement efforts, they feel, should be initiated in the developing countries. On...

  11. Chapter 8 Differentiated or Uniform International Carbon Taxes: Theoretical Evidences and Procedural Constraints
    (pp. 135-155)
    Jean-Charles Hourcade and Laurent Gilotte

    From the late 1980s to 1996, debates on economic incentives aiming at curbing greenhouse gas emissions focused on a uniform international carbon tax. There are many historical reasons why attempts to coordinate climate policies through price signal failed and why coordination through quantitative emission limits was adopted at CPO3 (3rd Conference of the Parties, Kyoto 1997). The latter framework, however, is not firmly established as long as the following question is unresolved: which rules should be adopted for the distribution of primary rights to developing countries? If no politically acceptable rule can be found, the negotiation agenda may see the...

  12. Chapter 9 Efficiency and Distribution in Computable Models of Carbon Emission Abatement
    (pp. 156-168)
    Joaquim Oliveira Martins and Peter Sturm

    Although much uncertainty surrounds the precise links between carbon emissions and their effect on climate, the risks involved are by now considered sufficiently large for the global community to have started discussing active policy measures. In this context special attention is being paid to the reduction of carbon emissions from the use of fossil fuels. The need for abatement action being generally recognized, the search is on for “efficient” policy instruments, that is, instruments that achieve a given abatement objective at minimum cost. In this context uniform global emission taxes and tradable emission quotas have been suggested as policy instruments...

  13. Chapter 10 Securitizing the Biosphere
    (pp. 169-179)
    Graciela Chichilnisky and Geoffrey Heal

    A handful of firms in traditionally dirty industries have decided that they can make more money by embracing environmental goals than by fighting them. At the leading edge of the environmental movement, British Petroleum, Monsanto, Dupont, Compaq, 3M, S.C. Johnson, Dow Chemical, Weyerhauser, and Interface are major corporations improving their financial performance by cleaning and greening their operations [1]. They are making money by reducing their environmental impact. This is not entirely surprising: Costanza et al. [2] have suggested that environmental services have great value, although they did not indicate how this value can be realized. Here we take this...

  14. Chapter 11 Equity and Efficiency in Emission Markets: The Case for an International Bank for Environmental Settlements
    (pp. 180-217)
    Graciela Chichilnisky

    Global institutions created after World War II—the World Bank, the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT)¹—led the world into an unprecedented period of industrialization, material expansion, and global commerce. Called the Bretton Woods institutions, they emerged from the premise that trade and economic growth could help defuse international conflicts and accelerate the reconstruction after the devastations of war.² Under the aegis of these institutions, economic growth led to record industrial expansion and resulted in an ever-increasing use of energy and natural resources. At the end of this 50-year period, we face...

  15. Chapter 12 The Clean Development Mechanism: Unwrapping the “Kyoto Surprise”
    (pp. 218-241)
    Jacob Werksman

    Proposals that led to the adoption of the Clean Development Mechanism (CDM, Article 12) of the Kyoto Protocol² emerged late in the negotiating process, and consensus on the final text developed with unprecedented speed. The speed of this process, and the centrality of the CDM in brokering the final outcome of Kyoto, have led the chairman of the negotiations to refer to Article 12 as the “Kyoto Surprise.”³ Aspects of the CDM are undeniably innovative and have the potential to take the climate regime and indeed international law into uncharted territory. However, many of the CDM’s core concepts can be...

  16. Chapter 13 Knowledge and the Environment: Markets with Privately Produced Public Goods
    (pp. 242-246)
    Graciela Chichilnisky

    What do environmental emissions have in common with knowledge? This chapter sees both as privately produced public goods¹ and gives conditions for efficient allocation of resources in economies with such goods. These conditions are independent of the units of measurement and extend those of Lindahl, Bowen, and Samuelson for standard public goods. The motivation is to understand efficiency in markets in which new types of items such as knowledge and environmental assets are traded along with standard private goods. Both are public goods in that they are not rival in consumption. However, they are privately produced and thus differ from...

  17. Chapter 14 A Commentary on the Kyoto Protocol
    (pp. 247-254)
    Raúl Estrada-Oyuela

    The Kyoto Protocol to the UN Framework Convention on Climate Change is the product of 30 months of complex negotiations and of a climactic last-minute adoption, so that a good number of its articles and paragraphs need interpretation and further elaboration. In many points agreements were reached on the basis of the “openness” of the drafting and postponement of definitions.

    During the next two years a lot of work had to be done on those points through informal gatherings and workshops and intergovernment conferences. Such meetings have already been held by the Royal Institute of International Affairs at Chattam House...

  18. Appendix The Kyoto Protocol of the United Nations Framework Convention on Climate Change
    (pp. 255-280)
  19. List of Contributors
    (pp. 281-286)
  20. Index
    (pp. 287-298)