Transcript env econ - University of Puget Sound

environmental economics
Chapter 13
2 issues
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
what is appropriate level of waste?
how to achieve that level (who has to reduce
how much?)
take usual approach



identify efficient levels of pollution
discuss market levels of pollution
demonstrate how policy can reconcile
pollutant taxonomy
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stock pollutants: accumulate over time / little or no
absorptive capacity
–
–
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fund pollutants: some capacity to be absorbed
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–
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nondegradable materials
heavy metals
organic pollutants
CO2
efficient allocation depends on nature of pollutant
fund pollutants: efficient allocation
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if no accumulation, future damage
independent of current emissions…can use
static framework
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max net benefit from pollution
–
minimize costs: 2 types
damage costs (increasing in pollution)
 control / avoidance / abatement costs
(decreasing in pollution)
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efficient allocation of a fund pollutant
efficiency: MCC = MDC
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points left of Q* (less pollution) inefficient
–
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points right of Q* (more pollution) inefficient
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cost > benefit in damages avoided
damages > cost of cleanup
increasing or decreasing control would
increase TC
optimal pollution not zero
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cases where could be very close to zero
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MDC of first unit > first unit MCC (plutonium?)
$
MDC
MCC
pollution
market allocation of pollution
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damage costs externalities; control costs not
–
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cheap to a firm not cheap to society
problem particularly severe with stock
pollutants
–
extra burden on future generations due to
accumulation
policy responses
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how to achieve MCC = MDC?
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legal limits (Q*)
internalize damage through tax / charge
system
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easy in theory / difficult in practice
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need to know Q where 2 MC’s cross for every
emitter (high information costs)
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alternative: select Q based on other criteria
–
safe for human / ecological health
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then, how to allocate responsibility for meeting this
level?
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use cost-effectiveness criterion
–
not necessarily optimal, but minimizes cost given some
level Q
cost-effective allocation: example
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assume 2 sources currently emitting 30 units

reduce to 15 units
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how to allocate reduction between 2
sources?
cost-effective reductions
cost-effective reductions
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source 1 cleans up 10 units (cost A)
source 2 cleans up 5 units (cost B)
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any other allocation…higher TC (area bigger)
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demonstrates important proposition
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cost of achieving given reduction in
emissions will be minimized if and only if MC
of control (abatement) equal across emitters
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what policy instrument to achieve equality?
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–
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emissions standards
emissions charges
emissions trading
emissions standards
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command and control
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equal reduction?
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not cost-effective
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first source lower cost
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total costs increase if both forced to clean up same
emission charges
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fee on each unit emitted
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profit-maximizing firm controls rather than
emits when cheaper to do so
cost-minimizing control of pollution
with an emission charge
emission charges
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if no pollution control, pay OTBC
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best can do?
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no: cheaper to pay to reduce emissions until MC
reduction = emissions charge
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minimizes cost by cleaning up 10 units and emitting
5 units
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pay OAD in control, ABCD in emission charges, total
costs OABC < OTBC
emission charges
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if levied same charge on both, each source
would control until MC = charge, and
independently choose levels of control
consistent with equal MC costs
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as long as authority imposes same charges,
automatically minimize TC of control
–
despite lack of information on firm’s costs
how to SET appropriate emissions
charge?
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iterative trial and error
choose rate, observe reduction
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if too large, reduce
if too small, increase
charges not only create cost-effective
allocation, also stimulates technological
progress
cost savings from technological
change: charges versus standards
charges vs. standards
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Q standard based on specific technology
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as new technology discovered, standards tightened
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firms have incentive to HIDE technological advances
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with charges system, firm saves $ (A+B) if can
reduce pollution at MC < T
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voluntarily reduces emissions from Q0 to Q1
transferable emission permits
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can identify cost-min allocation without trial and error
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all sources required to have permits to emit
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freely transferable
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authority issues exactly # permits needed to produce
desired emission level
emissions permit system
emissions permit system
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suppose source 1 has 7 permits (1 permit = 1
emission unit)
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suppose source 2 has 8 permits
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controls 8 units
controls 7 units
both firms have incentive to trade (MC2>MC1)
emissions permit system
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source 2 can lower cost by buying permit from
source 1 at price < C
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source 1 better off selling permit at price > A
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transfer until
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source 1 has 5 permits (controlling 10)
source 2 has 10 permits (controlling 5)
permit price = B
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neither source had incentive to trade further
other issues with instruments
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revenue effect
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taxes / charge system raises revenue; permits do
not
may be “double dividend”…use revenue to offset
other taxes
another issue: uncertainty
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cost of being wrong
MCC
$
MDC
$
use charges
MDC
MCC
use permits
emissions controlled
Prevent large fluctuations in damage costs
emissions controlled
Prevent large fluctuations in control costs