Green Trading
Green trading encompasses all the forms of environmental financial trading which include sulphur dioxide, carbon dioxide, nitrogen oxide (ozone), energy credits and energy efficiency. All the emerging and established financial markets have the objective of making the environment cleaner by either, using clean technology, reducing emissions or not energy through the use of financial markets (Burgman p.32).
According to Epstein (p.51), green trading is one of the mechanisms used to accelerate change to a cleaner environment by use of market-based incentives which have global application. Many companies are seeking ways to clean up their environmental impact and U.S funds some current projects to advance green technology. The bad energy practices that cannot be eliminated can be offset through the funding projects which are actively developing cleaner energy practices and increased future energy efficiency. In November 2008, Versus Carbon Neutral and seventeen businesses of Atlantas Virginia Highland formed a unique partnership as the first Carbon-Neutral Zone in the United States.
There is a recent interest in knowing whether there are legitimate reasons in using trade policy to solve environmental problems. There are several proposals on trying to use trade policy for environmental purposes. For example, the US ban on yellow-fin tuna from Mexico which were allegedly imposed because of the catching methods of Mexican tuna fishers being harmful to dolphins. The use of green trade policy has been viewed to be illegitimate because of two main reasons. Some of the green trade measures put in place for environmental purposes seems to violate present GATT rules. Secondly, other measures are generally more efficient in solving environmental problems (Hammond and Maskin p.32).
This research paper, analyses a case study of green trading in the context of environmental economics.
2.0 Literature Review
There is a great deal in the community concerning environmental issues and some of these issues are a result of disagreement about the role of ethics in decision making. The issue of reducing emissions of greenhouse gases has been addressed by organizations being involved with emergent markets for trading emission permits. Investment in equipment that reduces emissions will lead to generation of emission credits for sale in the market. Real options analysis in the market-based regulatory policy is a very important tool for the energy industry which is disproportionately impacted by greenhouse gases policies (Kolstad p.43).
Efficiency in the global economy will not be achieved until domestic environmental regulations are supplemented by trade provisions. This is dependent on whether the environmental problems are international or local. When green trade regulations are implemented, efficiency requires domestic environmental taxes be fixed at the pigouvian tax rate (Burgman p.34). This will result in an economic rationale for regulating the trade between signatories and non-signatories of the international environmental agreements. Efficient trade regulations will take the form of trade promotions or trade regulations depending on what created the environmental problem, whether production or consumption activities and if the net import of a commodity is positive or negative.
According to Oates and Baumol (p.26), the green trade agenda entails greater political management and the regulation of private sector in order to safeguard social and environmental goals. According to the view of environmental groups like Worldwatch institute, trade can bring greater prosperity and also improve the quality of life both in the developed and developing countries. The Worldwatch institute encourages countries globally to engage effectively in productive trade.
This can only be achieved if it is properly managed otherwise it can be an engine to enormous destructions of biodiversity, natural resources and global climate.
Lack of stringent environmental regulations have in the past given firms an unfair competitive trade advantage resulting to an environmental subsidy which enables firms to undercut prices in export markets. This phenomenon is known as eco-dumping or environmental dumping. Vice president Al Gore in his bestselling Earth in the Balance, argues that the weak and ineffectual enforcement of pollution control measures should be included in the definition of unfair trading practices (Maskin p.67).
Colell and Green (p.13) states that the link between environmental improvement and economic growth is clear when the ecological successes of the developed world are reviewed. The economies of OECD countries have grown by approximately 80 percent since 1970 according to the World Bank. Air quality has also improved dramatically and particulate emissions have dropped by 60 percent and sulfur dioxide emissions by 38 percent. Pollution from large shipping accidents and oil spills has also reduced and nearly all countries have increased the acreage of their forestlands.
According to Maskin (p.69), environmentalists have more to fear from protectionism. Current agricultural policies cause major distortions of world food production and industrial countries encourage agricultural production with price supports and other subsidies totaling 200 billion per year, while developing countries discourage agricultural production through tax and trade policies.28 Agricultural subsidies in the United States, for example, are responsible for intense chemical pesticide and fertilizer use on farmlands. By fostering inefficient land use, US subsidies and land set-aside programs contribute to soil erosion and loss of wetlands and forests. Federal mismanagement also encourages farmers to overplant while discouraging crop rotation, depleting soils and exacerbating pest eradication.
3.0 Methodology
The methodology used was the use of basic environmental economic models to show the differences between carbon tax and carbon cap-and-trade policies. Two models were examined with a single polluting firm and also with two polluting firms. The models were chosen for the methodology as they clearly illustrate green trading and the taxes to be subjected to a company. The model helps companies to make effective decision in minimizing pollution thus being subjected to lesser taxes (Epstein and Raniel p.56).
3.1 A Model of a Single Polluting Firm
Consider a polluting firm with an increasing marginal pollution abatement cost curve. If it is left unregulated it will abate zero units of carbon and it will avoid the abatement costs represented by the area underneath the marginal abatement cost curve B C D.
Figure 1 Carbon tax vs. Carbon cap
Supposing optimal abatement occurs at the blue dot where the marginal benefit and marginal cost curves intersect for benefit-cost analysis, the resulting level of emissions is e which is measured right to left along the horizontal axis.
Carbon Tax
To achieve this level of abatement the tax can be set where marginal benefit equals marginal abatement cost which is represented by the horizontal tax line. It will be cheaper for the polluting firm to abate carbon emissions as long as the marginal abatement cost is lower than the tax. The firm will choose to abate since the tax bill (A B) is great than the marginal abatement cost bill (B) to the left of the vertical cap line. To the right of the cap line the marginal abatement cost bill (C D) is greater than the tax bill (D) and therefore firm will choose to pay the tax and continue to pollute.
Carbon Cap
Another way to achieve this level of abatement is to set a cap where marginal benefit equals marginal abatement cost which is represented by the vertical cap line. In this case the polluting firm must abate its carbon emissions to e (Epstein and Raniel p.57).
3.2 A Model with Two Polluting Firms
The diagram below illustrates the increasing marginal abatement costs of two firms. Assume that one has an old, dirty plant with high abatement costs shown in blue that goes right to left with abatement and the other firm has a newer plant that has lower abatement costs shown in green that goes left to right with abatement. The width of the horizontal axis is the abatement to be achieved in order to reduce overall emissions to the efficient level.
Economic efficiency is achieved where the two marginal abatement costs intersect. The total costs of achieving the efficient abatement or emissions level is C G K and the efficient emissions level, e, shows that the low abatement cost firm should reduce more emissions than the high abatement cost firm.
Figure 2 Tax vs. Cap-and-Trade
Carbon Tax
This level of abatement can be achieved by setting a tax where the marginal abatement costs are equal. It will be cheaper for the polluting firms to abate carbon emissions as long as the marginal abatement cost is lower than the tax.
The high cost firm will abate to e (right to left) and it will suffer abatement costs of K and pay a tax bill equal to B C F G. The low cost firm will as shown by the diagram abate to e (left to right) and will suffer abatement costs of C G and pay a tax bill equal to J K (Epstein and Raniel p.58).
Carbon Cap-and-Trade
This level of abatement can also be achieved by setting a carbon cap by issuing carbon permits to polluting firms where each permit gives the firm the right to emit one unit of carbon. If there is no political will to give more permits to the high cost firm in order to achieve efficiency, then it can be done fairly by giving each firm the same amount of permits which is represented by the vertical cap line. The abatement cost to the low abatement cost firm is equal to area C and the abatement cost to the high abatement cost firm is D F G K (Epstein and Raniel p.59).
The high cost firm might rather have a permit than pay those high costs. It could propose a trade if it recognizes that its marginal abatement cost is higher than the marginal abatement cost of the low cost firm. The blue line over area D, F and G is a demand curve for permits and the green line is a supply curve for permits. The region between the blue and green line is a permit price that is mutually agreeable between both firms. A competitive permit market will result in a permit price which is equivalent to the efficient carbon tax and trading reduces overall abatement costs by area D F.
4.0 Data analysis
Epstein and Raniel (p.60), explains that in carbon tax single polluting firm, the efficient abatement level is achieved e, the abatement cost to the pollution firm B D and government revenue D. In carbon cap the efficient abatement level is achieved is e and the abatement cost to the pollution firm is B. In the case of modeling with two firm In carbon tax the efficient abatement level is achieved at e, the abatement cost to the polluting firms, C G K, is minimized and government revenue B C F G J K. In carbon cap the efficient abatement level is achieved at e and the abatement cost to the polluting firms, C G K, is minimized.
5.0 Results
In terms of the market failure both a carbon tax and carbon cap-and-trade will achieve the same level of increased efficiency by achieving the optimal abatement level at the minimum cost. The distributional implications will be the only difference. It is also seen that the cost to the firm is lower for carbon cap-and-trade and the government receives tax revenue with a carbon tax. Both policies are preferred over command and control regulation.
It is moreover realized from the model that when there is dynamic efficiency, firms have an incentive to adopt new technology to reduce their marginal abatement costs with both a carbon tax and carbon tax-and-trade. If there is a double dividend both Carbon taxes and auctioned permits will generate revenue for government that can be used to reduce a budget deficit. In addition, auctions or giveaways, the results of carbon cap-and-trade approach the results for a carbon tax as the extent to which permits are auctioned instead of given away to polluting firms increases (Burgman p.44). Auctions substitute for trading as high abatement cost firms have an incentive to bid higher.
6.0 Discussion
6.1 Environmental economies and Green trading
Environmental economics uses empirical or theoretical studies of national or local environmental policies around the world. It is concerned with the costs and benefits of alternative environmental policies used to deal with air pollution, toxic substances, solid waste, water quality and global warming. A central concept in environmental concept is the issue of externality. This occurs when a person makes a choice that affects other people not accounted for in the market price. For example, a firm emitting pollution does not take into account the costs that its pollution imposes on others. Green trading thus comes in to make the environment clean using various ways (Kolstad p.51).
According to Hammond and Maskin (p.859), the remedy for eco-dumping involves protectionism, industrial policy, and regulation.The government can impose tariffs on the offending nations imports to offset the unfair cost advantages of another nation or subsidize the exports of its politically-preferred businesses. Import and export restrictions and subsidies induce nations to adopt stricter environmental standards. Nations can harmonize their trade-related regulations and risk assessment practices and this will facilitate an overall improvement in standards. Harmonization of production standards is seen as a means of establishing minimum environmental standards in a regional trade agreement and also through a system of global environmental standards.
6.2 Green trading theories
Several theories have been used in green trading in the concept of environmental economics. One of them is the green theory. The term green is simply used to refer to environmental concerns. The green theory is concerned with questions of justice, rights, citizenship, the state, democracy, the environment and political economy branch for understanding the relationship between the state, the environment and economy. Decision theory is used and it states that ethics and decision theory give different advice on the course of action in a given situation as one says to do what is right while the other says to maximize expected utility. The decision theory explains the roles of ethics in environmental decision making (Epstein and Raniel p.59).
6.3 Environmental decision making strategies
Making viable decisions concerning the environment is very important. Two examples of environmental decision-making are triage and carbon trading. In environmental conservation setting, in triage, has the idea that in the face of potential species extinction, resources should be allocated to minimize the number of extinctions (Collel and Green p.74).
This means giving up on some species which have a very low chance of recovery or high price of recovery. This is done more precisely to minimize the expected number of extinctions and it may involve allowing some species to go extinct in order to save others. Carbon trading also known as offsetting is a way of controlling emissions of carbon dioxide. Companies are allowed only a certain quantity of carbon dioxide emissions of carbon dioxide and the companies that emit more are penalized. They have to buy carbon credits from other companies to increase their quota or else offset their emissions via carbon sequestration projects.
Companies are rewarded for emitting less than their quota. Individual economic players are expected to engage in emissions-reduction programs to the extent that is economically advantageous for them. Carbon trading is constrained to conservation goal. Both triage and carbon trading amount to strategies for efficient and cost-effective environmental conservation. Ethics must be applied in decision making to avoid conflict between triage and carbon trading (Maskin p.74).
6.4 Application of green trading in environmental pollution
Green trading has been used in various ways as a solution to environmental pollution. First, there are quotas on pollution. It is advocated that pollution reductions be achieved by way of tradeable emissions permits which if freely traded will ensure achievement of pollution reductions at least cost.
In theory, a firm therefore reduces its pollution load thus less cost than paying someone else to make the same reduction. In practice, the quotas on pollution approach are successful e.g. in U.Ss sulphur dioxide trading program and the European Union Emissions Trading Scheme (Epstein and Raniel p.58). There are also taxes and tariffs on pollution.
7.0 Conclusion
There is a huge amount of green investment under uncertainty. It can be socially costly if there is a core challenge like environmental that grows more dangerous with further delays in battling it. If a block of adjacent liberal states formed a Regional Green Trading Block, the collective effort would feature a large number of people and cover a large land area. If the Green Region would commit to demand a large share of electricity to be produced from renewable, then this consumer push would attract green investment. A green trading bloc could therefore be a building block to achieving a national carbon policy (Hammond and Maskin p.850). Many countries should join such a coalition for the greater the size of the market, the greater the economic opportunities for suppliers.
Environmental activists are concerned with trade between progressive nations and less developed countries. There are accelerated flows of international capital investment attracted by nations which do not have strict regulatory standards. This has led to creation of pollution havens. Increasing the costs of polluting discourages pollution and provides a dynamic incentive as the disincentive continues to operate when pollution levels fall. Green tax shift is advocated where there is a major shift from taxation from income and sales taxes to tax on pollution.
In addition to addressing the methodological concern raised in this research paper, future research should try to identify what characterizes firms with a strong association between environmental economics and green trading and also the environmental elements performance that is most likely to be improvable without resulting in worse economic performance e.g. the firms which could become green from self-interest and for which would strict regulations be necessary to protect the environment. This will provide helpful information in designing regulations and improving enforcement (Collel and Green p.79).