installation in the example described here. In this case marginal analysis is not valid,
and a large amount of installation cost may be incurred even for a small amount of
permits to be generated. Neither the marginal nor the average cost may be equalized
across firms. In the particular case of KPERMS, fixed costs constitute an important
component of the problem, therefore the initial permit allocation may matter and can
be used as a policy tool to improve not only equity among firms but also economic
efficiency.
Efficiency Loss
Unused ERCs may be interpreted as an efficiency loss. Such ERCs have two sources -
one from firms that adopt new technology and the other from firms with higher initial
allocation of permits than their actual emission levels. In this study, we only focus on
the unused ERCs that stem from ove- investment of control equipment. Thus,
efficiency loss will not be incurred by the firms whose unsold ERCs come from their
own initial endowment.
Due to the special features of LNB, the firms cannot fully control the amount of
NOx reduction once the equipment is installed. Thus, some firms may over-comply
the reduction target when they cannot sell all of their available permits. The efficiency
loss is then defined as the costs of generating those unused ERCs4. Table 2 shows that
the Taiwan-Power and Taiwan Plastic companies are the two firms that would incur
this type of efficiency loss in most cases. When the firms’ emission levels were
constant and the 20% rule was employed, the total efficiency loss would be smaller
because the number of unsold ERCs in this scenario would be small. When the firms’
emission levels were extrapolated differently and the 20% rule was used, we found
that the total unsold ERCs would be much lower than that in the 10% rule. However,
the unsold ERCs in this case come mainly from China Petroleum company that adopts
SCR which leads to a large efficiency loss.
The efficiency loss found here is not because of a bilateral trading process
and/or insufficient information for finding trading partners, but it is due to not having
full control ability of the installed equipment. In order to eliminate the efficiency loss,
we further simulate two cases where banking is allowed. In the first case, we assumed
that unused ERCs could be banked for one year. In the second case, no limit was
imposed on the useful life of ERCs. The simulation results all indicated that extending
the ERC life would not lower the efficiency loss. This is because firms adopting new
technology were the same with or without banking. Thus, banking would only defer
the efficiency loss from one year to another during the planning horizon.
4 Efficiency loss is equal to the unit abatement cost (annualized fixed costs of equipment divided by
total NOx reduction.) multiplied by the amount of unused ERCs.
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