Assignment # 02

1) Emission tax
2) Marketable Emission Permits
3) Energy pricing

Subject: Energy & Environment

Submitted to: Engr.Ahtsham Razaque sb.

Submitted By: M.Akhtar Abbas

Class: M.Sc. Chemical Engineering (session-2019-2020)

Registration # 2019-UET-IEFR/M.SC.CHEM/FD/05
EMISSION TAX
An Emission Tax is a tax on emissions created through industrial and commercial processes
such as coal fueled electricity generation and fossil fuel burning for transportation. It is a
consumptive tax, meaning that it can be avoided and minimized. OR

Emission taxes involve tax payments that are directly related to the measurement (or
estimation) of the pollution caused.

There are basically two types of market-based incentive policies: (1) taxes and subsidies and (2)
transferable emission permits. Both require a regulator to put the program into effect and to
monitor outcomes, so they are less decentralized than liability laws or letting parties bargain over
emission levels. Regulators set a price for pollution via taxes and subsidies and set quantities of
allowed emissions with transferable emission permits. The market determines the price of
pollution under the permit approach. Under each policy, polluters make their own decisions
about the amount of pollution to emit based on the prices per unit pollution they face.

The most straightforward incentive-based approach to controlling emissions of a particular

residual is to have a public agency offer a financial incentive to change those emissions. This can
be done in two ways: by taxing each unit of emissions, or by giving a subsidy for each unit of
emissions that the source cuts back.
We deal first with emission taxes, sometimes also called emission charges. Emission taxes
imply that polluters are able to discharge any amount of the taxed pollutant they wish, but they
will be required to pay a tax for every unit (e.g., tonne) discharged. For example, the British
Columbia government has imposed a carbon tax in 2008 on over 75 percent of the greenhouse
gases emitted in the province as a means of reducing carbon dioxide emissions and ameliorating
global warming. BC’s goal is to reduce carbon emissions by 1/3 of their 2007 level by 2020 and
to be 80% below 2007 levels by 2050. When an emission tax is put into effect, those responsible
for emissions must pay for the services of the environment—transportation, dilution, chemical
decomposition—just as they must pay for all other inputs or goods they use. Once pollution is
“priced” by the tax, those who release it will have an incentive to release less of it; that is, to
conserve on their use of environmental services. How do they do this? Any way they wish
(within reason). This may sound flippant, but in fact it represents the main advantage of this
technique. By leaving polluters free to determine how best to reduce emissions, they can use
their own energy and creativity, and their desire to minimize costs, to find the least-cost way of
reducing emissions. It could be any combination of pollution abatement, substitution of one good
for another, internal process changes, changes in inputs, recycling, or shifts to less-polluting
outputs. In the case of BC’s carbon tax, people may reduce their dependence on motor vehicles
by driving less, taking public transit, car pooling, adding more insulation to their homes to
reduce heating costs. Industries may shift from higher carbon-intensive fuels such as petroleum
and coal to less carbon-intensive fuels such as natural gas or electricity, which in BC is
predominately produced by hydro-power and hence, carbon free. More detail on BC’s carbon tax
is provided below.
 The essence of the tax approach is to provide an incentive for the polluters
themselves to find the best way to reduce emissions, rather than having a
central authority determine how it should be done.

Total private cost of compliance of an emission tax is defined as the sum of

abatement costs and the tax bill for the polluter.
Polluters will minimize their total private costs by reducing emissions until the
tax rate equals their marginal abatement cost.

Emission Taxes vs. a Standard

Compare the tax approach with an emission standard. With the tax, the firm’s total outlay is
$3,750. Suppose that, instead, the authorities had relied on an emission standard to get the firm to
reduce emissions to 25 tonnes/month. In that case, the firm’s total outlay would be only the
$1,250 in abatement costs. Thus, the tax system ends up costing the firm more than the standards
approach. With a standard, the firm has the same total abatement costs as in the tax system but it
is still essentially getting the services of the environment free, while with a tax system it has to
pay for those services. But while polluting firms would thus prefer standards to emission taxes,
there are good reasons, as we shall see, why society would often prefer taxes over standards.

The Socially Efficient Tax

In competitive situations, higher taxes will bring about greater reductions in emissions, but just
how high should the tax be set? If we know the marginal abatement cost and marginal damage
function, the economist’s answer is to set the tax so as to produce the efficient level of emissions
 Social costs of compliance include only the real resources used to meet the
environmental target; they do not include the tax bill.
Net social benefits of a policy are defined as the total damages forgone net of
the social costs of compliance.

Emission Taxes and Cost-Effectiveness

Perhaps the strongest case for a policy of emission taxes is to be made on grounds of cost-
effectiveness; that is, when controlling multiple sources of emissions in a way that satisfies the
equimarginal principle. If we apply the same tax rate to different sources with different marginal
abatement cost functions, and each source reduces its emissions until their marginal abatement
costs equal the tax, then marginal abatement costs will automatically be equalized across all the
sources. To repeat,
the imposition of an emission tax will automatically satisfy the equimarginal
principle because all polluters will set the tax equal to their MAC curve. MACs
will be equalized across all sources.

Other Types of Taxes

So far, we have discussed only one type of tax: an effluent or emissions tax. Since it is the
emission of residuals that leads directly to environmental pollution, taxes on emissions
presumably have the greatest leverage in terms of altering the incentives of polluters. But there
are many situations where it is impossible or impractical to levy taxes directly on emissions. In
cases where we can’t measure and monitor emissions at reasonable cost, taxes, if they are to be
used, would obviously have to be applied to something else. A good case of this is the problem
of water pollution from fertilizer runoff in agriculture. It is impossible to tax the kilograms of
nitrogen in the runoff because it is a nonpoint-source pollutant and thus not directly measurable.
The same problem applies to agricultural pesticides. What may be feasible instead is to put taxes
on these materials as they are sold to farmers; that is, a tax per tonne of fertilizer or per 100
kilograms of pesticide purchased. This tax exists in some US states. The tax is to reflect the fact
that a certain proportion of these materials ends up in nearby streams and lakes. Raising the
prices of these items would give farmers the incentive to use them in smaller quantities. The
higher price also creates the incentive to use the fertilizer in ways that involve less waste; for
example, by reducing the amounts that run off.

Distributional Impacts of Emission Taxes

There are two primary impacts of effluent taxes on the distribution of income and wealth:
 impacts on prices and output of goods and services affected by the tax
 effects stemming from the expenditures of revenues generated by the tax
Businesses subject to a tax will experience an increase in costs, because of both abatement
costs and the tax payments. From the firm’s standpoint, these would constitute increases in
production cost that, like any cost of production, they would presumably pass on to consumers.
Whether and how much they can do this depends on competitive conditions and the conditions of
demand. If the tax is applied to a single firm or small group of firms within a competitive
industry, it will not be able to push its price up above the industry price, and so will have to
absorb the cost increase. In this case, the impacts will be felt entirely by owners of the firm and
the people who work there. Many firms fear or pretend to fear being in precisely this situation,
and base their public objections to taxes on this outcome. If the tax is applied to an entire
industry, then prices will go up and consumers will bear part of the burden. How much prices go
up depends on demand conditions. Price increases are often thought of as regressive because, for
any given item, an increase in price would affect poor people proportionately more than higher-
income people. For something that both poor and well-off people consume, like electricity, this
conclusion is straightforward. For price increases in goods consumed disproportionately by more
well-to-do people (e.g., airline travel), however, the burden would be mostly on them.
The burden on workers is tied closely to what happens to the rate of output of the affected
firms. Here again, the extent of the output effect depends on competitive conditions and the
nature of demand for the good. If the emission tax program is applied to a single firm in a
competitive industry, or if the demand for the output of an industry is very responsive to price,
output adjustments will be relatively large and displaced workers could result. The long-run
burden is then a matter of whether good alternative sources of employment are available.
While burdens because of price and output changes may be real, we have to remember that
on the other side the tax program is creating substantial benefits in the form of reduced
environmental damages. To know how a program affects any particular group we would have to
account also for how these benefits are distributed.
If emission tax revenues are recycled back to the community in the form of tax cuts and
credits, much of the impact on low-income people can be mitigated. For example, BC’s carbon
tax cuts the personal income tax rates to the first two tax brackets by 5% and provides a tax
credit of just over $100 per adult and $30 per child each year to low-income households. For all
but the most carbon-intensive families, these tax cuts from the revenue recycling should offset
most of the impact of the carbon taxes on energy prices. In Europe, governments return part of
their carbon taxes to industry either through tax cuts or to help finance the purchase of pollution-
control technology. As long as the payments do not make the marginal emissions tax rate
effectively lower, the incentive effects of the tax are not affected. Alternatively, they might be
used to pay for other environmental initiatives in places where direct public action is called for.
They might even be used to reduce other government debt, with benefits flowing to taxpayers in
general.

Abatement Subsidies
An emission tax works by placing a price on the environmental asset into which emissions are
occurring. Essentially the same incentive effects on the margin would result if, instead of a tax,
we instituted a subsidy on emissions. Here, a public authority would pay a polluter a certain
amount per tonne of emissions for every tonne the polluter reduced, starting from some
benchmark level. The subsidy acts as a reward for reducing emissions. More formally, it acts as
an opportunity cost: when a polluter chooses to emit a unit of effluent, they are in effect forgoing
the subsidy payment they could have had if they had chosen to withhold that unit of effluent
instead. Table 12-1 shows how this works in principle, using the same numbers used for Figure
12-1. The regulator pays a subsidy for each unit by which the polluter reduces its emissions,
starting from a base level. We assume the base level is its emissions rate before any policy is
imposed: 50 tonnes/month. The polluter receives a subsidy of $100 per tonne for every tonne it
cuts back from this base. The fourth column shows its total subsidy revenues, and the last
column shows total subsidies minus total abatement costs. This net revenue peaks at 25
tonnes/month, the same emissions level the polluter would choose with the $100 tax. In other
words, the incentive is to reduce emissions to the point where the unit price of the subsidy
intersects the MAC curve; the equilibrium reached is in theory the same for each polluter as with
the emissionstax.

Table 12-1: An Abatement Subsidy

Many of the points we made earlier about emission taxes also apply to emission subsidies.
The job of monitoring emissions would be essentially the same. But there would undoubtedly be
great difficulties in establishing the original base levels from which reductions are to be
measured. Each source would wish to have this base level set as high as possible. Perverse
incentives might be present in the planning stages because sources might try to increase their
emissions in the hopes of increasing their base. There is, however, an additional problem with
subsidies not faced by taxes. To be able to pay subsidies to polluters, governments will have to
raise revenue in some way. The extra revenue needed for subsidies could come from more
government debt, higher income or sales taxes, and so on. If governments can’t raise revenues,
they have two other options. They could cut back on expenditures in other programs, or forgo
revenues if the subsidy takes the form of a tax write-off (say, for investment in pollution-
abatement equipment). In each of these situations, it is likely that undesirable effects on the
economy will occur. Given the current difficult fiscal situation in most jurisdictions, subsidies
are generally not seen as viable environmental policies except in special circumstances.
A further difference between taxes and subsidies is on their effect on total emissions from an
industry. Although an emission subsidy like we have described would have the same incentive
for each individual source, total emissions may actually increase. To understand why, note the
difference in the financial position of this firm when it emits 25 tonnes of pollutant under the two
programs: with the tax it has total costs of $3,750, while with the subsidy it has a total revenue of
$1,250. Thus, the financial position of the firm is much different. In effect, it will be earning
higher profits after the imposition of the subsidy, and this can have the effect of making this
industry more attractive for potential new firms. We have the possibility, in other words, of
having the emissions per firm go down but the number of firms in the industry—and therefore
total output and total emissions—go up. This feature is a major drawback of simple subsidies
like this. Subsidies may raise the total emissions from an industry even though they reduce
emissions per firm.
Deposit–Refund Systems
One place where subsidies may be more practical is in deposit–refund systems. A deposit–refund
system is essentially the combination of a tax and a subsidy. The tax is the deposit and the
subsidy is the refund—a type of penalty and reward program. The purpose of the subsidy is to
provide the incentive for people to refrain from disposing of these items in environmentally
damaging ways. It is their reward. The funds for paying the subsidy are raised by levying taxes
on these items when they are purchased. In this case, the purpose of the tax is not necessarily to
get people to reduce the consumption of the item, but to raise money to pay the subsidy. If
people choose not to return the item and collect their refund, the tax can be viewed as a disposal
charge.
Deposit–refund systems are particularly well-suited to situations where a product is widely
dispersed when purchased and used, and where disposal is difficult or impossible for authorities
to monitor. In Canada, six provinces have enacted deposit–refund systems for beverage
containers, some like BC cover all beverages except milk products, others focus on beer, wine
and soft drinks. The goal of these policies is to reduce litter and to encourage recycling. BC also
has deposit-refund systems for car batteries, tires, paint, and a growing number of other products.
This approach has also been widely used in Europe with what is called ‘cradle to grave’
recycling. For example, in Sweden and Norway, deposit–refund systems have been instituted for
cars. New-car buyers pay a deposit at time of purchase, which will be refunded when and if the
car is turned over to an authorized junk dealer. Experience with these systems shows that success
depends on more than just the size of the deposit–refund. For example, it is essential that the
collection system be designed to be reasonably convenient for consumers.

Carbon Tax at a Glance

A carbon tax is a form of explicit carbon pricing; it refers to a tax directly linked to the level of
carbon dioxide (CO2) emissions, often expressed as a value per tonne CO2 equivalent (per
tCO2e).1 Carbon taxes provide certainty in regard to the marginal cost faced by emitters per
tCO2e, but do not guarantee a maximum level of emission reductions, unlike an emissions
trading scheme. However, this economic instrument can be used to achieve a cost‐effective
reduction in emissions.   Since a carbon tax puts a price on each tonne of GHG emitted, it sends a
price signal that gradually cause a market response across an entire economy, creating incentives
for emitters to shift to less greenhouse‐gas intensive ways of production and ultimately resulting
in reduced emissions.  

Where Carbon Is Taxed

Carbon taxes can be introduced as an independent instrument or they can exist alongside other
carbon pricing instrument, such as an energy tax. While the experience with direct carbon tax
implementation is relatively new, such instruments are being introduced at a fast pace. The table
below provides an overview of existing national and subnational jurisdictions that have
introduced a direct carbon tax.  
SUMMARY
Emission taxes attack the pollution problem at its source, by putting a price on something that
has been free and, therefore, overused. The main advantage of emission taxes is their efficiency
aspects: If all sources are subject to the same tax, they will adjust their emission rates so that the
equimarginal rule is satisfied. Administrators do not have to know the individual source of
marginal abatement cost functions for this to happen; it is enough that firms be faced with the tax
and then left free to make their own adjustments. A second major advantage of emission taxes is
that they produce a strong incentive to innovate and discover cheaper ways of reducing
emissions.
The apparent indirect character of emission taxes may tend to work against their acceptance
by policy-makers. Standards have the appearance of placing direct control on the thing that is at
issue, namely emissions. Emission taxes, on the other hand, place no direct restrictions on
emissions but rely on the self-interested behaviour of firms to adjust their own emission rates in
response to the tax. This may make some policy-makers uneasy, because firms apparently are
still allowed to control their own emission rates. It may seem paradoxical that this “indirect”
character of effluent taxes can sometimes provide a stronger inducement to emission reductions
than seemingly more direct approaches.
 But emission taxes require effective monitoring. They cannot be enforced simply by
checking to see if sources have installed certain types of pollution-control equipment. If emission
taxes are to have the appropriate incentive effects, they must be based closely on cumulative
emissions. Thus, point sources where emissions can be effectively measured are the likely
candidates for pollution control via emissions taxes.
An advantage of emission taxes is that they provide a source of revenue for public
authorities. Many have recommended that tax systems be changed to rely less on taxes that have
distorting economic effects and more on emissions taxes. This requires that authorities be able to
predict with accuracy the effects of particular emission taxes on rates of emissions.
Emissions subsidies would have the same incentive effect on individual polluters, but they
could lead to increases in total emission levels. One place where subsidies have been used
effectively is in deposit–refund systems, which are essentially tax and subsidy systems in
combination.

Marketable emission permits

An alternative to emissions taxes is marketable pollution permits, which allow their owners to
emit a certain quantity of pollution during a particular period. ... They can trade their permits; a
firm that emits less than its allotted 250 tons can sell some of its permits to another firm that
wants to emit more.
Marketable permits are a type of government-created license that regulates the level of a
particular activity.  Often, they ration the use of a resource (for instance, clean air by limiting
pollution, fisheries by limiting fish catch, or the electromagnetic spectrum by allocating it among
various uses), but they may also be used to satisfy affirmative obligations to engage in an activity
(such as requirements to produce renewable energy).  Marketable permits are distinguishable
from other regulatory permits in that they can be bought or sold independently of any real
property or other interest. Because marketable permits are alienable, it is particularly important
to define their longevity and the privileges conveyed by their ownership, so that parties will
understand exactly what it is that they are purchasing.

Marketable permitting programs generally fall into one of three types.  In “cap-and-trade”
programs, regulators set a limit, or cap, on the total amount of activity that can take place.  For
example, the cap could be total tons of a pollutant, total number of fish that can be caught, or
total number of airport landing slots.  A “rate-based trading” program is similar, but instead of
capping the total amount of a regulated activity, agencies limit the relative amount of activity per
regulated entity or unit of regulated activity.  For example, a rate-based air pollution permit
market may limit the amount of pollution power plants can emit per unit of electricity generated,
and fuel efficiency standards set limits on the acceptable amount of fuel required to drive a mile.
Finally, in “credit trading” systems, regulators set a relative goal (e.g., no net emissions increase
or no net increase in property development), and then any covered entities seeking, for example,
to increase emissions or develop property must purchase offsetting credits that are sold by third
parties and verified by regulators.  Credits can be earned when parties limit their level of the
regulated activity by more than the required amount.  Credit systems can also be combined with
cap-and-trade or rate-based programs.  For example, in a greenhouse gas cap-and-trade program,
unregulated sources may be allowed to reduce their emissions voluntarily and sell verified
credits on the market.  In a property development setting, a party could decline to develop a
particular parcel of land to generate a credit, and then sell that credit to another party. 

Establishing a Marketable Permitting Program

Like other agency activities, marketable permitting programs must be within the agency’s
statutory authority.  But even when an agency has statutory discretion to use a marketable
permitting program, such a program may not be the most suitable regulatory tool to achieve an
agency’s goal.  Marketable permitting programs are more likely to be suitable when:

 The agency can clearly define the privileges or obligations to be assigned by the program
and has the necessary information to set the level of regulated activity.
 The agency has sufficient resources to design and administer the program and is capable
of reevaluating the appropriate target level of activity over time.
 The agency finds it difficult or expensive to discern compliance costs for individual
regulated parties.  This often occurs when the activity to be regulated is conducted by
numerous heterogeneous or small sources, or when there are as yet unrealized
opportunities for significant technological developments by actors other than those upon
whom the regulatory obligations fall.
 The agency is reasonably confident that a robust market is feasible.  This requires interest
and participation by regulated entities that have, or are capable of developing, sufficient
knowledge to make efficient decisions in the market.
 Regulated parties have sufficiently differing compliance costs, such that the savings from
trading are likely to be greater than transaction costs.  
 The agency determines that the overall level of an activity is more significant than the
identity or location of the actors engaging in the activity.  Alternatively, a marketable
permit system could take locational differences into account in its structure, by, for
example, setting prices so that it costs more to buy permits in a place where the marginal
benefits of cutbacks are high.

Marketable permitting programs are less likely to be suitable when:

 The balance of factors listed above is not favorable.

 The risk of unintended consequences from trading, such as the potential for localized
problems, is difficult to manage.

Once an agency has decided to create a marketable permitting program, it must consider how to
establish it.  Many agencies have used notice-and-comment rulemaking when creating a
marketable permitting regime.  In a handful of instances, agencies have established marketable
permitting programs through guidance documents.  Since agencies cannot impose legally binding
obligations through guidance documents, this latter approach can lead to some uncertainty
among existing and prospective permittees and even agency officials as to the permanence of the
program.  While notice-and-comment rulemaking has costs, it also has the virtue of soliciting
stakeholder input while a rule is being shaped.  Public input can be beneficial in determining
whether a particular activity lends itself to regulation via a marketable permitting regime and, if
so, how the program should be designed so as to best serve the public interest.

Allocating Permits

Once a marketable permitting program has been established, permits will need to be distributed. 
The initial allocation of permits is referred to as the “primary market” for permits. agencies
typically develop systems and regulations to allocate and keep track of permits and to verify their
ultimate retirement, under their authority to implement the underlying permitting program.   
Agencies predominantly follow one of two approaches in distributing permits: historical-based
allocations and auctions.  Historical-based allocations distribute permits based on historical use
of the regulated activity.  This method is typically used to avoid disruptions to the status quo, to
protect returns on past investments, and to ease tensions with the regulated industry and gain
political support.  However, it may also reward parties for engaging in activity that the agency
now wants to curb, increase the risk of monopolies in the permit market, reduce the incentive to
innovate, and incentivize undesirable strategic behavior, like a firm artificially inflating its use of
a resource ahead of an allocation benchmark to increase its share of allocated permits.

By comparison, distributing permits through auctions reduces the barriers to entry to the
regulated activity.  Auctions also tend to lower the risk of monopolies and strategic behavior,
facilitate price discovery, and prevent undue windfalls.  However, auctions can be challenging to
administer, especially for agencies without prior experience in doing so, and may require
significant resources upfront to design and implement.

There are also several other, less common ways of conducting initial permit allocation that may
be useful in certain specialized contexts.  These include output-based allocations, allocating
permits to particular communities, or allocating permits based on other policy objectives. 

In deciding how to allocate permits, agencies must make two additional important decisions.
The first is to decide who is eligible to purchase permits.  Some agencies restrict the buying and
selling of permits to regulated entities, whereas others allow non-regulated parties—such as
brokers, speculators, market facilitators, or the general public—to purchase permits.  Allowing
access to the market for permits to a wider range of parties can promote market liquidity and
facilitate efficient price discovery, though it also increases the risk of market participants trying
to “corner the market” (amassing permits to control prices).  Allowing unregulated parties to buy
permits and retire them also allows the public to decrease the level of the cap.

The second is whether to hold a pool of permits in reserve for future entrants.  Once the initial
allocation of permits has been made, in the absence of competitive markets, permit holders may
have an incentive to impede purchases from potential new competitors. Agencies have
sometimes addressed this barrier to entry by creating a reserve pool of permits for new entrants.
Some agencies have also instituted similar mechanisms for introducing permits into the market
in the wake of large economic changes or emergencies that heavily drive demand for permits.

Overseeing a Marketable Permitting Program

Once initial permit distribution has occurred, agencies will want to ensure that parties comply
with any obligations that arise under their permits.  Monitoring ongoing performance is essential
to achieving compliance with permit obligations.  This includes tracking ownership of permits
through their lifecycle, tracking the amount of regulated activity by permit holders, and verifying
that credits represent real offsets of regulated activity.  Agencies often conduct compliance
monitoring themselves, but sometimes rely on self-verification by regulated parties or use third
parties to verify compliance.
In the event that regulated parties engage in more of the regulated activity than their permits
allow, agencies have several enforcement tools. For instance, agencies can require parties to buy
additional permits until their use is in compliance with the number of permits they possess and
can require parties to develop plans to ensure future compliance.  Agencies can also impose
sanctions.  There is evidence that compliant parties are more supportive of enforcement in
marketable permitting programs because noncompliance by other parties lowers the value of
their allowances. 

Compliance monitoring and enforcement are important aspects of ensuring the integrity of a
marketable permitting program.  Another involves overseeing secondary and derivative markets
that may emerge, with or without government assistance, following the initial allocation of
permits.  The secondary market for permits involves transactions in which permits are bought
and sold following their initial entry into commerce in the primary market.  This is in contrast to
derivative markets, which are primarily risk management and price discovery markets in which
actual transfer of permits might not occur. Trading in secondary and derivative markets can be
accomplished through (1) negotiations between buyers and sellers—which may or may not be
facilitated by third parties (these are known as over-the-counter transactions)—or (2)
exchanges, which match buyers and sellers in standardized transactions.     

The authority to oversee trading on secondary markets is somewhat fragmented, and authority
over marketable permit programs is not always well defined and would benefit from
clarification.  The Commodity Futures Trading Commission (CFTC) has broad enforcement
authority to pursue manipulation of the price of a commodity in interstate commerce. It also has
the authority to surveil spot trading (sales for the immediate delivery of a commodity) conducted
on exchanges. However, the CFTC only rarely brings enforcement actions for fraud in spot
markets.  The Federal Trade Commission (FTC)—under its authority to act against unfair,
anticompetitive, and deceptive practices affecting commerce—and the Department of Justice—
under its antitrust authority—also have some authority over secondary permit markets, though
they have had limited involvement with marketable permitting programs to date.  An individual
agency’s ability to oversee secondary markets will depend on its statutory authority, but even
when it does have such authority, it may lack the expertise or resources to routinely monitor
trading in these markets.   

Authority to oversee derivative markets is largely vested in the CFTC  It oversees derivatives
traded in exchanges, which must publish certain kinds of trading information that would allow
the CFTC to detect fraud and manipulation.  The CFTC also has authority to oversee over-the-
counter transactions.  The CFTC’s authority over derivative markets, and particularly over-the-
counter derivative transactions, was strengthened by the Dodd-Frank Wall Street Reform and
Consumer Protection Act.

Agencies with authority to oversee permit markets have various tools to combat fraud,
manipulation, and price volatility, all of which can undermine economic efficiency and erode
confidence in permit markets.  Fraud and manipulation can be addressed through various
mechanisms, such as position limits, accountability triggers, market surveillance, and reporting
requirements.  Position limits can be used to ensure that no single party or combination of parties
can control the supply of permits to the point of dictating prices.  Position accountability triggers,
which require permit holders wishing to exceed a certain threshold of permits to submit to
additional reporting and oversight, can likewise be used to prevent hoarding of permits. 
Effective surveillance of markets and robust reporting requirements also discourage fraudulent
activity. 

Price volatility can occur in marketable permitting programs even without fraudulent activity,
particularly in smaller, less robust markets with fewer participants, due to unexpected increases
in demand or the costs of compliance.  Volatility increases the risk of noncompliance and
decreases confidence in the market system.  Tools to address volatility include circuit breakers,
which limit how much prices can rise or fall in a given period, and safety valves, which can set
maximum or minimum prices or release reserve credits into the market in case of emergencies or
demand spikes.  Another way to reduce volatility is to issue permits with different durations. 
Finally, by defining a broader program that covers more entities under a single market, agencies
can diversify the portfolio of permit seekers, reducing the risk of unexpectedly high cost in an
isolated sector.  Any individual regulated sector can experience unexpected compliance costs as
economic conditions change; a broader market offers more flexibility, better absorbs price
volatility, and so increases certainty for regulated parties and investors.

Because permit markets rely heavily on the decisions of both the agency and permit buyers,
facilitating the flow of information is an extremely important part of a marketable permitting
program.  Making data on permit transactions, prices, and holdings publicly available can help
the agency and the public assess the efficacy of the program.  It also enables smooth operation of
the permit markets by enabling permit buyers to better evaluate the value of the permits.  Having
clear communication policies for announcing policy changes or enforcement actions that could
influence the market prevents pre-publication leaks and information asymmetries that could
unjustly benefit some parties and undermine the permit market. 

Energy Pricing
Like pricing on the financial market, the most basic principles of supply and demand are
responsible for price fluctuations in the energy market. The price for electricity or natural gas
will vary depending on how much buyers need and how much the market has to offer.

Carbon Pricing

A carbon price — the method widely agreed[1] to be the most efficient way for nations to
reduce global warming emissions — is a cost applied to carbon pollution to encourage polluters
to reduce the amount of greenhouse gases they emit into the atmosphere: it usually takes the
form either of a carbon tax or a requirement to purchase permits to emit, generally known
as carbon emissions trading, but also called "allowances

Gasoline & Diesel Pricing

The usage and pricing of gasoline (or petrol) results from factors such as crude oil prices,
processing and distribution costs, local demand, the strength of local currencies, local taxation,
and the availability of local sources of gasoline (supply). Since fuels are traded worldwide, the
trade prices are similar. The price paid by consumers largely reflects national pricing policy.
Some regions, such as Europe and Japan, impose high taxes on gasoline (petrol); others, such
as Saudi Arabia and Venezuela, subsidize the cost.[1] Western countries have among the highest
usage rates per person. The largest consumer is the United States, which used an average of 368
million US gallons (1.46 gigalitres) each day in 2011

Electricity Pricing

Electricity pricing (also referred to as electricity tariffs or the price of electricity) can vary

widely by country or by locality within a country. Electricity prices are dependent on many
factors, such as the price of power generation, government taxes or subsidies, local weather
patterns, transmission and distribution infrastructure, and multi-tiered industry regulation. The
pricing or tariffs can also differ depending on the customer-base, typically by residential,
commercial, and industrial connections.
According to the U.S. Energy Information Administration (EIA), "Electricity prices generally
reflect the cost to build, finance, maintain, and operate power plants and the electricity grid."
Where pricing forecasting is the method by which a generator, a utility company, or a large
industrial consumer can predict the wholesale prices of electricity with reasonable accuracy.
[1]
 Due to the complications of electricity generation, the cost to supply electricity varies minute
by minute.[2]
Some utility companies are for-profit entities and their prices include a financial return for
owners and investors. These utility companies can exercise their political power within existing
legal and regulatory regimes to guarantee a financial return and reduce competition from other
sources like a distributed generation

Rate structure

In standard regulated monopoly markets like the United States, there are multilevel governance

structures that set electricity rates. The rates are determined through a regulatory process that is
overseen by a Public Service Commission. In addition, the Federal Energy Regulatory
Commission (FERC) oversees the wholesale electricity market along with the interstate
transmission of electricity. Public Service Commissions (PSC), which are also known as Public
Utility Commissions (PUC), regulate utility rates within each state.

The inclusion of renewable energy distributed generation (DG) and advanced metering

infrastructure (AMI or smart meter) in the modern electricity grid has introduced many
alternative rate structures [4]. There are several methods that modern utilities structure residential
rates:

 Simple (or fixed) – the rate at which customers pay a flat rate per kWh
 Tiered (or step) – rate changes with the amount of use (some go up to encourage energy
conservation, others go down to encourage use and electricity provider profit)
 Time of use (TOU) – different rate depending on the time of day
 Demand rates – based on the peak demand for electricity a consumer uses
 Tiered within TOU – different rates depending on how much they use at a specific time
of day
 Seasonal rates – charged for those that do not use their facilities year-round (e.g. a
cottage)
 Weekend/holiday rates – generally different rates than during normal times. among the
few residential rate structures offered by modern utilities.
The simple rate charges a specific dollar per kilowatt ($/kWh) consumed. The tiered rate is one
of the more common residential rate programs. The tiered rate charges a higher rate as customer
usage increases. TOU and demand rates are structured to help maintain and control a utility's
peak demand. The concept at its core is to discourage customers from contributing to peak-load
times by charging them more money to use power at that time. Historically, rates have been
minimal at night because the peak is during the day when all sectors are using electricity.
Increased demand requires additional energy generation, which is traditionally provided by less
efficient "peaker" plants that cost more to generate electricity than "baseload" plants However, as
greater penetration from renewable energy sources, like solar, are on a grid the lower cost,
electricity is shifted to midday when solar generates the most energy.
A feed-in tariff (FIT) is an energy-supply policy that supports the development of renewable
power generation. FITs give financial benefits to renewable power producers. In the United
States, FIT policies guarantee that eligible renewable generators will have their electricity
purchased by their utility.[7] The FIT contract contains a guaranteed period of time (usually 15–
20 years) that payments in dollars per kilowatt hour ($/kWh) will be made for the full output of
the system.
Net metering is another billing mechanism that supports the development of renewable power
generation, specifically,solar powerThe mechanism credits solar energy system owners for the
electricity their system adds to the grid. Residential customers with rooftop photovoltaic (PV)
systems will typically generate more electricity than their home consumes during daylight hours,
so net metering is particularly advantageous. During this time where generation is greater than
consumption, the home's electricity meter will run backward to provide a credit on the
homeowner's electricity bill.[8] The value of solar electricity is less than the retail rate, so net
metering customers are actually subsidized by all other customers of the electric utility

Price comparison by power source

The cost of electricity also differs by the power source. The net present value of the unit-cost of
electricity over the lifetime of a generating asset is known as the levelized cost of
electricity (LCOE). LCOE is the best value to compare different methods of generation on a
consistent basis.
In the United States the EIA estimated LCOE for different sources in their Annual Energy
Outlook 2019 to be
Generation Source Total LCOE Including Tax Credit (2018 $/MWh)

Hydro 39.1

Solar PV 45.7

Wind (onshore) 49.8

Gas Combined Cycle 46.3–67.5

Nuclear 77.5

Biomass 92.2

Coal 98.6–104.3

The generating source mix of a particular utility will thus have a substantial effect on their
electricity pricing. Electric utilities that have a high percentage of hydroelectricity will tend to
have lower prices, while those with a large amount of older coal-fired power plants will have
higher electricity prices. Recently the LCOE of solar photovoltaic technology has dropped
substantially. In the United States, 70% of current coal-fired power plants run at a higher cost
than new renewable energy technologies (excluding hydro) and by 2030 all of them will be
uneconomic.In the rest of the world 42% of coal-fired power plants were operating at a loss in
2019.