Salmons, Roger; (2006) Trading mechanisms for the implementation of environmental policy. Doctoral thesis , UCL (University College London).

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Abstract

Relative performance standards are used in a wide range of environmental policy areas, and there is increasing interest on the part of practitioners in the potential for using market-based mechanisms to implement these standards. This thesis analyses the properties of a generic mechanism - performance-based credit trading - that can be used to implement any regulatory target that can be expressed in terms of a linear aggregate performance rule. The general formulation of the rule is very flexible and it can accommodate a variety of different forms of regulatory target, including relative performance standards for proportions, weighted averages, and rates. The environmental effectiveness and cost-efficiency of performance-based credit trading are analysed, and it is demonstrated that if all markets are perfectly competitive, then the mechanism will ensure that the regulatory target is met at the lowest possible economic cost. Comparative statics analyses are undertaken to assess the relationship between the performance rule parameters and the price of performance credits created under the mechanism, and it is shown that for particular types of performance standard it is possible that the price may fall as the standard becomes more stringent. Two specific policy applications - industrial energy efficiency and packaging recovery - are used to explore impacts of the mechanism on the prices and quantities of the market commodities included in the performance rule to show how market information can be used to estimate the cost of the regulatory intervention and to demonstrate how performance-adjustment factors can be used to manipulate the distributional impacts of the mechanism. Finally, the implications of relaxing the assumption of perfect competition are considered, and it is demonstrated that both the environmental effectiveness, and the cost-efficiency of the mechanism may be sensitive to the assignment of obligations and initial property rights.

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