On The Efficiency Of Environmental Regulation And The Mechanism Of Emission Trading Mechanism

■THESIS:On the Efficiency of Environmental Regulation and theMechanism of Emission Trading MechanismSPECIALIZATION:EconomicsPOSTGRADUATE (Grade 2007):Ji XiaoliMENTOR (name and title):Prof. Hong YinxingAbstract：Emission trading is an important mechanism of market environmentalreduction performance have shown in the practice. Tradable permit system is seriously recommended by the United Nations Development Programme to deal with the issues of energy saving and emission reduction in some aspects such as climate change. In China, the emission trading pilot project has been established since the late 80s in the 20th century, and its energy saving emission reduction potential constantlyappear. However, after 20 years of exploration, the emission trading market whichplays a giant role in emission trading mechanism has not really been set up. On thewhole, China’s emission trading system has not yet completed the pilot phase. In thispaper, emission trading is regarded as complementary system arrangement of thetraditional environmental regulation, aiming at providing guarantee for the sustainableeconomic development by "hardening" the economic growth restriction,closelyintegrated with the background of institutional economic transformation. Throughinspecting the efficiency features of emission trading mechanism of regulatedenvironmental capacity in pilot regions in China’s transitional phase to know aboutthe existing situation and prospect of the mechanism. The goal of the government environmental regulation is to protect and improveenvironmental quality, protect public interests, result in the balance betweenenvironment and economy and promote sustainable economic development, ratherthan completely eliminate environmental pollution. The criteria of evaluating whetherthe environmental regulation targets can be achieved must be based on efficiency. The efficiency advantages that emission trading mechanism has are displayed inthe following three aspects:For one thing, it has the cost savings effect. If enterprises’emission costs are different, and the enterprise production, emission intensity perbusiness unit of output and the business marginal abatement costs are independentamong themselves, but the given total emission and other conditions remain stable, the larger the total output of pollution regulated industries is, the more serious the pollution is, the more obvious the difference in the emission reduction costs is, the more stringent the environmental policy is, the more the emission trading and the Pigovian Tax mechanism in controlling environmental pollution has saved than order-control mechanism.For another, it has the effects of technological progress. Emission trading and Pigovian Tax mechanism use market price as signals about how to control pollution to encourage business people to conduct in technology, while they are trying to search for self-interest and fully meet political target, entrepreneurs manage to promote technology invention, innovation, generalization and expanding as much as possible; order-control regulation mechanism forces entrepreneurs to use unified standards or technology, so that entrepreneurs don’t have any initiative to apply new technology, for they can’t get any profits from the technology innovation. At last, it has welfare effect. As far as the direct welfare effect of the two environmental regulations is concerned, their absolute welfare effect is same. If environmental taxes are introduced, the government will obtain rare lease; However, on the occasion where emission rights are free-granted and auctioned, the rare lease is obtained by both the entrepreneurs and the government respectively; Order-control policy will either lead to rare lease loss (when emission amount and price are limited at the same time), or the absolute value of the consumers’ net surplus will significantly reduced; As far as the indirect welfare effect of the two environmental regulations is concerned, the long-term innovative welfare effect by selling emission right is larger than that of free-granted emission right; order-control regulation policy doesn’t have any encouragement for entrepreneurs with pollution problems to make any technical progress, thus, its indirect welfare effect to the society is nothing in the long run.In certain cases, the efficiency of emissions trading and emission reduction through charged emission is exactly the same. If the regulator who lacks the accurate prediction to the marginal social benefit curve will misjudge the optimal emission reduction, thus, the two mechanisms can both cause loss of social welfare. If the regulator lacks the ability to accurately predict the marginal cost curve, the estimated cost of pollution reduction and abatement will be deviate from the optimal level. When the real cost of pollution control is higher than the estimated pollution control cost curve, the reduction of pollution emission trading is relatively larger, while pollution charging makes emission reduction lower. From the regulator’s point of view, the main advantages of emission trading is the ability to control the total pollution emissions, and the advantages of charging emisson are the control of the pollution control price (or cost). But the over-low rates of emission charging will exceed the socially optimal level of emission. As the level of economic growth and prices is rising constantly, the initial apparent rate may no longer be appropriate; Relatively speaking, emission trading can be automatically adjustd according to the growth and inflation in the price of emission rights.The high transaction cost of the transition economies is an environmental factor of important regulations which are used to bind the evolution of emission trading mechanism. The relatively higher cost of obtaining emission right through the market under multidimensional governance in transition, the local protectionism resulted from the intergovernmental horizontal competition, the information asymmetry among the main bodies of emission market, and the emission rights’ special nature of commodities are the main reason why emission trading transaction cost tends to be higher in the process of carrying out emission trading in China. The existence of high system friction costs makes the price of emission rights under ideal conditions equal to the marginal source of the sewage pollution cost effective equilibrium solution which does not appear, the total expenditure on pollution control significantly increased, the level of social welfare decreased; the system friction cost will rise (or drop), to some extent, which will lead to the trading volume of emission right expanding (or shrinking) in the emission trading market; The fluctuation of multiplex market trading volume caused by trading cost fluctuation is mainly realized through affecting the marketing willingness of entrepreneurs with pollution problems.Based on the analysis of influence of estimating how trading cost affect entrepreneurs’behavior by using Probit model with binary-state variable, emission cost variable elaborates entrepreneurs’ decision to trade or not to trade, higher trading cost tends to result in the greater possibility for entrepreneurs to choose to withdraw from emission right market; Marginal analysis shows, if there isn’t any trading cost, entrepreneurs’ trading probability will increase more than 40%; The rise of pre-market trading volume can’t correspondingly urge latter entrepreneurs to increase their participation rate, which means that after many years of pilot project, trading cost doesn’t drop obviously. The amount of trading volume in the emission trading market has further reflected the fluctuation of government environment-protection authorities’ enthusiasm. Under the restraint of trading cost, entrepreneurs don’t have enough initiative of participation, the pace of promoting emission trading market is still slow, thus, it needs a lot of time for a emission right market to form to make new pollution regulation mechanism fully develop its function under the control of total amount.Case analysis on emission trading shows:China is on the transition phase from planned economy to market economy. Objectively, the outer system circumstances for system innovation in transitional economy is not very perfect, the dependant system planned supply that new system depends on lacks; Subjectively, administration dominant’s conventional thinking, opportunistic actions taken by various stakeholders as well as the bad design of emission trading system, whose trading procedures are complex and taking too much time, also influences trading efficiency. High system friction cost makes entrepreneurs unwilling to do the business, so as to restrain the formation of the emission trading market.