Economic Approaches to Reduce Externalities, Part 2: Cap-and-Trade Detailed

This is the second video in a two-part series.

In this second lecture on environmental economics, Dr. Sheila Olmstead presents an analytical example of cap-and-trade approaches to highlight the difference between market-based policies and prescriptive policies. She notes the cost-effectiveness of market-based policies in many scenarios and also identifies cases in which prescriptive policies are more appropriate. She ends with several examples of market-based approaches to environmental policy and the relative costs and benefits. 

In the lecture leading up to this—“Economic Approaches to Reduce Externalities, Part 1: Prescriptive vs. Market-Based”—Dr. Olmstead presents a summary of the use of economic approaches for dealing with environmental externalities such as pollution. She begins with prescriptive or command-and-control policies that include traditional regulatory approaches like “technical standards” and “performance standards.” The former requires use of specific technologies like scrubbers on smoke-stacks while the latter imposes an overall ceiling on pollution.  She next moves to market-based policies or regulations that include “price instruments,” “quantity instruments,” and “information-based approaches.” The price approach involves taxing negative externalities and subsidizing positive externalities, while the quality approach establishes a total cap on pollution for an entire group allocating permits to firms and allowing them to trade. The information-based approach provides information about the damages or benefits of a firm’s practices and products so that consumers can decide. 
 

  • About the Presenters
    Image
    Sheila Olmstead

    Sheila Olmstead

    Dr. Sheila Olmstead is a Professor at the University of Texas at Austin’s LBJ School of Public Affairs, a University Fellow at Resources for the Future (RFF), and a Senior Fellow at the Property and Environment Research Center (PERC). She is also an Editor of the Journal of the Association of Environmental and Resource Economists, and a Charter Member of the Science Advisory Board at the U.S. Environmental Protection Agency. In 2016-2017, she served in the White House as Senior Economist for Energy and the Environment on the President’s Council of Economic Advisers. Her current research...

    Image
    Sheila Olmstead

    Sheila Olmstead

    Dr. Sheila Olmstead is a Professor at the University of Texas at Austin’s LBJ School of Public Affairs, a University Fellow at Resources for the Future (RFF), and a Senior Fellow at the Property and Environment Research Center (PERC). She is also an Editor of the Journal of the Association of Environmental and Resource Economists, and a Charter Member of the Science Advisory Board at the U.S. Environmental Protection Agency. In 2016-2017, she served in the White House as Senior Economist for Energy and the Environment on the President’s Council of Economic Advisers. Her current research examines the economic benefits of water pollution control, the externalities associated with oil and gas development, free-riding in dam placement and water withdrawals in transboundary river basins, the welfare gains from water marketing, and many other topics in environmental economics and policy. She has also published many papers on water demand estimation and water conservation policy, and a bit on climate and energy policy.

  • Supporting Materials

    These supporting materials are for both parts of the two-part series.

    Presentation Slides:

    Document


    Reading Materials:
    Ferraro, P.J., and Pattanayak, S.K. (2006). Money for nothing? A call for empirical evaluation of biodiversity conservation investments. PLoS Biology 4(4), e105.

    Olmstead, Sheila M. (2015). “Applying market principles to environmental policy.” In: Environmental Policy: New Directions for the Twenty-First Century, 8th edition.  Ed. Norman J. Vig and Michael E. Kraft, Congressional Quarterly Press, Washington, D.C., 206–229.

Presenters
Sheila Olmstead, Lyndon B. Johnson School of Public Affairs, University of Texas at Austin
Date
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