에너지환경 경제학 (2)

1. 아주대학교 에너지시스템사업단 에너지환경 경제학 (2) 아주대학교 경제학과, 에너지시스템학과, 금융공학협동과정 교수 김수덕 (suduk@ajou.ac.kr)

2. Economics As a Science

3. The Production Opportunities of the Farmer and Rancher

4. The Circular Flow Diagram

5. Positive Economics • The essence of science is the scientific method • the dispassionate development and testing of theories about how the world works. • This method of inquiry is as applicable to studying a nation's economy as it is to studying the earth's gravity or a species' evolution. • As Albert Einstein once put it, "the whole of science is nothing more than the refinement of everyday thinking • The scientific method • observation, theory, and more observation • How does the interplay between the theory and observation work? • Does the challenge that experiments are often difficult in economics make economics not scientific? • The role of Assumption • Should an assumption be real? Or what does it have to do with the art of scientific thinking? • What is the role of different assumptions to answer different questions? • Positive vs. Normative Analysis

6. Natural resource economics • Natural resource economics deals with the supply, demand, and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to develop more sustainable methods of managing those resources to ensure their availability to future generations. • One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to develop more sustainable methods of managing those resources to ensure their availability to future generations. • The economics and policy area focuses on the human aspects of environmental problems. Traditional areas of environmental and natural resource economics include welfare theory, pollution control, resource extraction, and non-market valuation, and also resource exhaustibility,]sustainability, environmental management, and environmental policy. • Research topics could include • the environmental impacts of agriculture, • transportation and urbanization, • land use in poor and industrialized countries, • international trade and the environment, • climate change, and methodological advances in non-market valuation, to name just a few. welfare theory, pollution control, resource extraction, and non-market valuation, • and also resource exhaustibility, sustainability, environmental management, and environmental policy. • Natural resource economics also relates to energy, and is a broad scientific subject area which includes topics related to supply and use of energy in societies. Source: http://en.wikipedia.org/wiki/Natural_resource_economics

7. Environmental economics • Environmental economics is a subfield of economics concerned with environmental issues. Quoting from the National Bureau of Economic Research Environmental Economics program: • “ [...] Environmental Economics [...] undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world [...]. Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming.” • Environmental economics is distinguished from Ecological economics that emphasizes the economy as a subsystem of the ecosystem with its focus upon preserving natural capital. One survey of German economists found that ecological and environmental economics are different schools of economic thought, with ecological economists emphasizing "strong" sustainability and rejecting the proposition that natural capital can be substituted by human-made capital. For an overview of international policy relating to environmental economics, see Runnals (2011). • Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007) in their textbook Environmental Economics. Source: http://en.wikipedia.org/wiki/Environmental_Economics

8. Externality & Market Failure

9. The Market for Aluminum (Efficiency)

10. What is an externality? • Why do externalities make market outcomes inefficient? • How can people sometimes solve the problem of externalities on their own? Why do such private solutions not always work? • What public policies aim to solve the problem of externalities?

11. Introduction • One type of market failure: externalities. • Externality: the uncompensated impact of one person’s actions on the well-being of a bystander • Negative externality: the effect on bystanders is adverse • Positive externality: the effect on bystanders is beneficial • Self-interested buyers and sellers neglect the external effects of their actions, so the market outcome is not efficient.

12. Pollution: A Negative Externality • Example of negative externality: Air pollution from a factory. • The firm does not bear the full cost of its production, and so will produce more than the socially efficient quantity. • How govt may improve the market outcome: • Impose a tax on the firm equal to the external cost of the pollution it generates

13. Other Examples of Negative Externalities • the neighbor’s barking dog • late-night stereo blasting from the dorm room next to yours • noise pollution from construction projects • talking on cell phone while driving makes the roads less safe for others • health risk to others from second-hand smoke

14. Positive Externalities from Education • A more educated population benefits society: • lower crime rates: educated people have more opportunities, so less likely to rob and steal • better government: educated people make better-informed voters • People do not consider these external benefits when deciding how much education to “purchase” • Result: market eq’m quantity of education too low • How govt may improve the market outcome: • subsidize cost of education

15. Other Examples of Positive Externalities • Being vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce sectionafter you. • R&D creates knowledge others can use • Renovating your house increases neighboring property values Thank you for not contaminating the fruit supply!

16. The market for gasoline P $ 5 4 3 $2.50 2 1 0 Q(gallons) 25 0 10 20 30 Recap of Welfare Economics The market eq’m maximizes consumer + producer surplus. Supply curve shows private cost, the costs directly incurred by sellers Demand curve shows private value, the value to buyers (the prices they are willing to pay)

17. The market for gasoline P $ 5 external cost 4 3 2 1 0 Q(gallons) 0 10 20 30 Analysis of a Negative Externality Social cost= private + external cost Supply (private cost) External cost = value of the negative impact on bystanders = $1 per gallon(value of harm from smog, greenhouse gases)

18. The market for gasoline P $ 5 4 3 2 1 0 Q(gallons) 0 10 20 30 Analysis of a Negative Externality The socially optimal quantity is 20 gallons. Social cost S At any Q < 20, value of additional gas exceeds social cost At any Q > 20, social cost of the last gallon isgreater than its value D 25

19. The market for gasoline P $ 5 4 3 2 1 0 Q(gallons) 0 10 20 30 Analysis of a Negative Externality Market eq’m (Q = 25) is greater than social optimum (Q = 20) Social cost S One solution: tax sellers $1/gallon, would shift supply curve up $1. D 25

20. “Internalizing the Externality” • Internalizing the externality: altering incentives so that people take account of the external effects of their actions • In the previous example, the $1/gallon tax on sellers makes sellers’ costs equal to social costs. • When market participants must pay social costs, the market eq’m matches the social optimum. (Imposing the tax on buyers would achieve the same outcome; market Q would equal optimal Q.)

21. Positive Externalities • In the presence of a positive externality, the social value of a good includes • private value – the direct value to buyers • external benefit – the value of the positive impact on bystanders • The socially optimal Q maximizes welfare: • At any lower Q, the social value of additional units exceeds their cost. • At any higher Q, the cost of the last unit exceeds its social value.

22. P 50 $ 40 30 20 10 Q 0 0 10 20 30 ACTIVE LEARNING 1: Analysis of a positive externality The market for flu shots External benefit = $10/shot • Draw the social value curve. • Find the socially optimal Q. • What policy would internalize this externality? S D 22

23. P 50 $ external benefit 40 30 20 10 Q 0 0 10 20 30 25 ACTIVE LEARNING 1: Answers The market for flu shots Socially optimal Q = 25 shots To internalize the externality, use subsidy = $10/shot. S Social value = private value + external benefit D 23

24. Effects of Externalities: Summary If negative externality • market produces a larger quantity than is socially desirable If positive externality • market produces a smaller quantity than is socially desirable To remedy the problem, “internalize the externality” • tax goods with negative externalities • subsidize goods with positive externalities

25. Market Failure • Externality: the basic idea is that an externality exists when a person makes a choice that affects other people that are not accounted for in the market price. For instance, a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution in excess of the 'socially efficient' level may occur. A classic definition influenced by Kenneth Arrow and James Meade is provided by Heller and Starrett (1976), who define an externality as “a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency.” In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an efficient outcome. • Common property and non-exclusion: When it is too costly to exclude people from access to an environmental resource for which there is rivalry, market allocation is likely to be inefficient. The challenges related with common property and non-exclusion have long been recognized. Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion and common property. "commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns. The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation. See, however, Ostrom's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons. • Public goods and non-rivalry: Public goods are another type of market failure, in which the market price does not capture the social benefits of its provision. For example, protection from the risks of climate change is a public good since its provision is both non-rival and non-excludable. Non-rival means climate protection provided to one country does not reduce the level of protection to another country; non-excludable means it is too costly to exclude any one from receiving climate protection. A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.

26. Four Types of Goods/Bads Garbage Indoor air pollution Air, Noise pollution Garbage without enforcement & Law • Garbage:  Excludable bad, so long as there are laws and enforcement that help control its management and disposal

27. Market Efficiency and Market Failure MEC (Marginal External Cost) 생산가치의 극대화 MEC +MC 사회적 후생의 극대화

28. Public Good and Market Failure • 환경재의 공공재적 성격 • 호수 주변에 세가구가 살고 있다. • 현재 이 호수의 오염농도는 5ppm이며 정화시설을 설치하면 수질을 개선할 수 있다. • 가구들은 아래와 같이 그 비용을 지불할 의사가 있다 • Incentive to Under-report • => Market Failure

29. Public Policies Toward Externalities Two approaches • Command-and-control policiesregulate behavior directly. Examples: • limits on quantity of pollution emitted • requirements that firms adopt a particular technology to reduce emissions • Market-based policiesprovide incentives so that private decision-makers will choose to solve the problem on their own.

30. Solutions (Market Failure and Gov’t Intervention) • Environmental Regulations • Pay-As-You-Throw • Taxes and tariffs on pollution/Removal of "dirty subsidies • Quotas on pollution • TREC (tradeable emissions reduction permits) • Property Rights and Coase Theorem

31. Solutions (Environmental Regulations) • Pay-As-You-Throw • EPA supports this new approach to solid waste management because it encompasses three interrelated components that are key to successful community programs: • Environmental Sustainability - Communities with programs in place have reported significant increases in recycling and reductions in waste, due primarily to the waste reduction incentive created by PAYT. Less waste and more recycling mean that fewer natural resources need to be extracted. In addition, greenhouse gas emissions associated with the manufacture, distribution, use, and subsequent disposal of products are reduced as a result of the increased recycling and waste reduction PAYT encourages. In this way, PAYT helps slow the buildup of greenhouse gases in the Earth's atmosphere which leads to global climate change. For more information on the link between solid waste and global climate change, go to EPA's Climate Change Web site. • Economic Sustainability - PAYT is an effective tool for communities struggling to cope with soaring municipal solid waste management expenses. Well-designed programs generate the revenues communities need to cover their solid waste costs, including the costs of such complementary programs as recycling and composting. Residents benefit, too, because they have the opportunity to take control of their trash bills. • Equity - One of the most important advantages of a variable-rate program may be its inherent fairness. When the cost of managing trash is hidden in taxes or charged at a flat rate, residents who recycle and prevent waste subsidize their neighbors' wastefulness. Under PAYT, residents pay only for what they throw away.

32. Solutions (Environmental Regulations)

33. 음식물 쓰레기 종량제의 필요성 Source: 음식물쓰레기 종량제시스템 도입 및 구축방향, 대진대학교 환경공학과 김병태, 2011. 11. 25

34. RFID (radio frequency identification) 기반 시스템 구성도 Source: 음식물쓰레기 종량제시스템 도입 및 구축방향, 대진대학교 환경공학과 김병태, 2011. 11. 25

35. Solutions (Taxes and tariffs on pollution) • Corrective tax: a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality • Also called Pigouvian taxes after Arthur Pigou (1877-1959). • The ideal corrective tax = external cost • For activities with positive externalities, ideal corrective subsidy = external benefit • Taxes and tariffs on pollution/Removal of "dirty subsidies." • Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive," that is, the disincentive continues to operate even as pollution levels fall. • A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. • Some advocate a major shift from taxation from income and sales taxes to tax on pollution - the so-called "green tax shift."

36. Corrective Taxes & Subsidies • Example: Acme, US Electric run coal-burning power plants. Each emits 40 tons of sulfur dioxide per month. SO2 causes acid rain & other health issues. • Policy goal: reducing SO2 emissions 25% • Policy options • regulation: require each plant to cut emissions by 25% • corrective tax: Make each plant pay a tax on each ton of SO2 emissions. Set tax at level that achieves goal.

37. Corrective Taxes & Subsidies • Suppose cost of reducing emissions is lower for Acme than for US Electric. Socially efficient outcome: Acme reduces emissions more than US Electric. • The corrective tax is a price on the right to pollute. • Like other prices, the tax allocates this “good” to the firms who value it most highly (US Electric). • Under regulation, firms have no incentive to reduce emissions beyond the 25% target. • A tax on emissions gives firms incentive to continue reducing emissions as long as the cost of doing so is less than the tax. • If a cleaner technology becomes available, the tax gives firms an incentive to adopt it. • Other taxes distort incentives and move economy away from the social optimum. • But corrective taxes enhance efficiency by aligning private with social incentives.

38. The Equivalence of Pigovian Taxes and Pollution Permits • 버스회사로 하여금 공급곡선을 자신의 사적한계비용을 나타내는PMC가 아니라 새로운 사적 한계비용을 나타내는 PMCt로 느끼고 행동할 수 있도록 세금 t 를 부과하는 방법. • 사회적 비용을 고려한 것과 동일한 결과에 도달하여 사회적으로 바람직한 수준만큼 버스가 운행되고 오염배출량이 결정되도록하는 결과. • 현실적용에 있어서는 측정의 문제가 가장 큰 제약 Pollution Permit

39. Example of a Corrective Tax: The Gas Tax The gas tax targets three negative externalities: • congestionthe more you drive, the more you contribute to congestion • accidentslarger vehicles cause more damage in an accident • pollutionburning fossil fuels produces greenhouse gases

40. Solutions (Environmental Regulations) • congestion charges or road usage charges Source: Jonathan Leape, The London Congestion Charge, Journal of Economic Perspectives—Volume 20, Number 4—Fall 2006—Pages 157–176

41. Solutions (Quotas on pollution) • tradeable emissions permits, which if freely traded may ensure that reductions in pollution are achieved at least cost. • In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction. • In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems. Point Carbon Secondary CER OTC 자료: http://www.pointcarbon.com

42. Tradable Pollution Permits in the Real World • SO2 permits traded in the U.S. since 1995. • Nitrogen oxide permits traded in the northeastern U.S. since 1999. • Carbon emissions permits traded in Europe since January 1, 2005. • Examples: • CCX(Chicago Climate Exchange), • CFE(Chicago Climate Future Exchange) • ECX(European Climate Exchange) • Emission Credit 의 종류 • AAUs (Assigned Amount Units) • EUAs (EU Allowance Units) • CERs (Certified Emission Reductions) • ERUs (Emission Reduction Units) • RMUs (Removal Units)

43. 탄소배출권거래제 • 최근 언론에서 자주 보도되는‘탄소배출권거래제’는 지구온난화의 주범인 이산화탄소(CO₂)의 배출을 억제하기위해 도입된 강력한 경제적수단 중의 하나다. 탄소배출권은 2005년부터 EU 국가를 중심으로 본격적으로 거래되기 시작해 높게는CO₂ 톤당 30유로까지 높은 가격대에서 거래됐다가 최근 글로벌 경기침체와 유가하락으로 10유로대에서 거래되고있다. • 탄소배출권거래제는 기업에 도전이자 기회기도 하다. 하나의 탄소배출권은 CO₂1톤을 배출할 수 있는 권리를 의미하는데, 만일 어느 기업이 배출권을 확보하지못하면 화석연료의 사용과 그에 따른 생산활동에 제약을 받게된다. 보유한 배출권의 양이 자신이 배출한 CO₂의 양보다 적을 경우에는 소정의 페널티를 지급해야한다. 현재 EU에서는 이같은 초과배출량에 CO₂톤당 100유로의 높은 페널티를 부과하고있다. 페널티를 치르지 않으려면 탄소 배출권시장에서 높은 가격을 내고서라도 배출권을 매입해야한다. 한편, 기업이 나름대로 노력해 온실가스의 배출을 줄여 배출권이 필요 이상으로 많이있다고 판단되면 이를 시장에서 매도할수있다. • 탄소배출권은 재화를 생산하는 기업만 거래할수있는 것이 아니기 때문에, 전문적인 금융거래기관도 관심을 가질수있다. 배출권의 매입과 매도의 메커니즘은 증권거래소에서 주식이나 선물을 사고 파는것과 유사해 저가매입에 고가매도를 통한 차익의 실현을 목적으로 참여할수있다. 특히, 자본시장통합법이 시행됨에 따라 탄소배출권 등 다양한 파생상품의 개발이 보다 탄력을 받을 것으로전망되며, 배출권의 특성상 선물거래도 활성화될 것으로 보인다. • 하지만 탄소배출권 본연의 취지가 금융파생상품보다는 온실가스감축을 위한 규제적수단이라는점을 인식할 필요가 있다. 이러한 점에서EU는 전문적인 탄소배출권거래시장을 따로 개설하거나 전력거래소가 거래의 중추적기능을 맡도록하고있다. 배출권 거래시장은 배출권 실수요자 중심으로 편성되는것이 바람직하다는 인식이 있기 때문이다. • 최근 미국월스트리트와 우리나라의 키코파생상품에서 경험했듯이 파생상품의 관리에는 금융당국의 엄격한 모니터링과 불공정거래, 비대칭정보에 관한 관리, 감독기능이 강화돼야한다는 교훈을 배웠다. 탄소배출권이 파생상품의 투기적 열풍으로 기업에 과도한 재정적부담이 되지않으며, 또 그 부담이 소비자에게 전가되는일을 예방하기 위해서는 국내에서도 탄소배출권은 향후 실수요자위주로 거래되도록 제도가 설계돼야 할 것이다.

44. Tradable Pollution Permits • Recall: Acme, US Electric each emit 40 tons SO2, total of 80 tons. • Goal: reduce emissions 25% (to 60 tons/month) • Suppose cost of reducing emissions is $100/ton for Acme, $200/ton for US Electric. • If regulation requires each firm to reduce 10 tons, cost to Acme: (10 tons) x ($100/ton) = $1,000 cost to USE: (10 tons) x ($200/ton) = $2,000 total cost of achieving goal = $3,000

45. Tradable Pollution Permits • Alternative: • issue 60 permits, each allows its bearer one ton of SO2 emissions (so total emissions = 60 tons) • give 30 permits to each firm • establish market for trading permits • Each firm can choose among these options: • emit 30 tons of SO2, using all its permits • Trade the permit • emit < 30 tons, sell unused permits • buy additional permits so it can emit > 30 tons

46. Tradable Pollution Permits Suppose market price of permit = $150 One possible equilibrium: Acme • spends $2,000 to cut emissions by 20 tons • has 10 unused permits, sells them for $1,500 • net cost to Acme: $500 US Electric • emissions remain at 40 tons • buys 10 permits from Acme for $1,500 • net cost to USE: $1,500 Total cost of achieving goal: $2,000

47. Tradable Pollution Permits • A system of tradable pollution permits achieves goal at lower cost than regulation. • Firms with low cost of reducing pollution sell whatever permits they can. • Firms with high cost of reducing pollution buy permits. • Result: Pollution reduction is concentrated among those firms with lowest costs. • When policymakers do not know the position of this demand curve, the permits system achieves pollution reduction targets more precisely. • Some politicians, many environmentalists argue that no one should be able to “buy” the right to pollute, cannot put a price on the environment. • However, people face tradeoffs. • The value of clean air & water must be compared to their cost. • The market-based approach reduces the cost of environmental protection, so it should increase the public’s demand for a clean environment.

48. Private Solutions to Externalities Types of private solutions: • moral codes and social sanctions, e.g., the “Golden Rule” • charities, e.g., the Sierra Club • contracts between market participants and the affected bystanders • The Coase theorem: If private parties can bargain without cost over the allocation of resources, they can solve the externalities problem on their own.

49. Coase Theorem (시장의 자발적 해결) Source: 강의자료8-환경문제의 해결방안, 인천대손양훈, 2009

50. See Spot bark. The Coase Theorem: An Example Dick owns a dog named Spot. Negative externality: Spot’s barking disturbs Jane, Dick’s neighbor. The socially efficient outcome maximizes Dick’s + Jane’s well-being. • If Dick values having Spot more than Jane values peace & quiet, the dog should stay. Coase theorem: The private market will reach the efficient outcome on its own…