EME 444
Global Energy Enterprise

Introduction to Nonmarket Analysis


Nonmarket environments refer to the domain of concerns that cannot be controlled or managed exclusively through an individual’s or organization’s market-based interactions. For example, many of us are concerned with climate change, environmental damage from energy resource extraction, electric power reliability, worker safety and fair wages, and energy affordability, to name a few! These are concerns we cannot always effectively address with conventional transactions or contracts.

Our nonmarket concerns are associated with a set of issues which can be resolved in a number of ways. Based upon our beliefs, we develop expectations about how our nonmarket concerns are affected by these alternative resolutions. And based on our individual and/or organizational objectives, we have preferences over the set of possible outcomes for each issue. For example, a particular carbon cap-and-trade proposal is an issue associated with at least two nonmarket concerns: climate change and energy affordability. Any individual or organization concerned with climate change or energy affordability will likely have preferences for or against a particular carbon cap-and-trade proposal.

Take a Look!

For those of you have taken EGEE 401, this may look familiar (it should!). Either way, spend four minutes to take a look. This is an entertaining and very good explanation of the principles of cap and trade. Please watch the following (3:29) video:

Click for a transcript of "Cap and Trade" video.

HANK GREEN: I just ran across a rather disturbing statistic. Apparently, Americans have no idea what cap and trade is. When Rasmussen asked Americans what cap and trade was, most of them had no idea, and 29% of them said that it had something to do with regulatory reform on Wall Street. Only 24% said that it had anything to do with environmental issues. I thought maybe this EcoGeek could be of some service. Now you probably know what cap and trade is, but maybe you need a refresher course. And maybe you just want to share it with your friends and family, so they too can have some idea about the most important environmental legislation ever.

So cap and trade, in its simplest form-- basically, the government says to all of the companies in the country, we can only have this much of a certain pollutant. That's the cap. We simply cannot have more than that much pollution. And if we do, we're going to fine the crap out of all of you.

Then the government distributes credits for the release of those pollutants to all of the companies that produce those pollutants. Ideally, they give the companies credits for less pollution than they're already polluting with, so then the companies either have to reduce their pollution or buy credits from someone else. If the company is able to reduce its pollution below its current credit level, then it can sell or "trade away" those credits to companies that are having a harder time.

So basically, the government creates an artificial economic market in pollution. So then the amount of money that the companies are willing to spend decreasing their pollution is directly proportional to the amount of money it would cost them to buy the credits if they weren't able to reduce their pollution. Success! We have a new economic market, and everyone wants to reduce their pollution!

But wait. There are problems. We run into the first problem when we say that the credits are "distributed." How are they distributed? There are two ways. Basically, there's grandfathering, in which you get credit based on the amount of pollution you're already producing-- which seems kind of lame to me. I mean, it's like, oh, you're the biggest polluter! Here, have the largest number of credits!

Or two, they can be auctioned off. That's the way that the Obama administration is looking at doing it. They're actually hoping to have huge amounts of money generated by the auctioning off of these carbon credits. But economists are kind of like, wait a second. So you created an artificial market, and you're selling nothing for billions of dollars? Also, the polluting corporations don't like it at all. But to me, it seems like a fairly fair way to do things.

The second problem with cap and trade is that, yes, the money has to come from somewhere. So whatever sectors of the economy are doing all that pollution, the prices of their services are going to go up. So yes, gasoline prices and energy prices would increase. And if gasoline and energy prices are increasing, what we have is not a cap and trade system. It's a tax. It's a tax! Boo, taxes! Rah, rah, rah! I like my money. Don't take my money away!

But it's certainly more popular than a straight carbon tax, and with good reason. First, we don't have to call it a "tax," and people like that. Second, say there's one coal power plant that can reduce its emissions relatively easily, and there's another in which it would be extremely expensive to reduce its emissions. The coal plant that has an easy time can reduce its emissions twice over, and the coal plant that's having a hard time doesn't have to do it. So you get the same amount of reduction in the end, but the costs are much lower.

Cap and trade systems have actually been used in America for a long time, mostly on sulfur dioxide, which is the stuff that causes acid rain. And since cap and trade legislation went into place on sulfur dioxide, energy prices have not increased substantially, but the emission of sulfur dioxide has gone down like 50% despite huge increases in power generation. So yes, it works!

Well, it works for sulfur dioxide, anyway. The question is, will it work for greenhouse gases? Hopefully, we will find out soon. The Obama administration hopes to have cap and trade legislation on the books by 2012. And from then on, the government can continually lower the cap, and that strong market in carbon credits should spur innovation in wind power, carbon sequestration, solar power, electric cars, and who knows what else.

And that, my friends, is why I as an EcoGeek am excited about cap and trade, and why America should, yeah, have some idea what I'm talking about. This is Hank Green from ecogeek.org. 

Any issue will involve a set of stakeholders' concerns that are sufficient to justify expending resources to influence the ultimate outcome. In the case of carbon cap-and-trade, stakeholders primarily concerned with energy affordability and believing that such a policy would increase energy costs will likely prefer that a cap-and-trade scheme not be implemented. In contrast, stakeholders primarily concerned with climate change, and who believe that such a policy will mitigate climate change will likely prefer that the cap-and-trade scheme succeed.  Keep in mind that it is usually not so cut-and-dry.  As you will see moving forward, most stakeholders have a range of nonmarket concerns with varying degrees of intensity and priority, and so deciding which side of an issue one is on can be complicated. You didn't think this would be easy, did you?

Nonmarket analysis summarizes the set of stakeholders in a way that facilitates evaluating the range of potential outcomes for each issue.