Transcript Economic Incentive ----- Versus----

“Economic Incentive
----- Versus----Command and Control:
What’s the Best Approach for Solving
Environmental Problems”
By Winton Harrington & Richard D. Morgenstern
Fall/Winter 2004, Resources, pp. 13-17.
http://www.rff.org/RFF/Documents/RFF_Resources_152_ecoincentives.pdf
No Single Solution
• Economic Incentives (EI)
– Some sort of monetary fee/fine per unit of
pollution emitted
• Command and Control (CAC)
– Direct regulation
• Study looked at six environmental policies
in the United States and European Union.
Six Policies
•
SO2 emissions from utility boilers
» Permit Market (US)
» Sulfur Emissions Standards (Germany)
•
NOX emissions from utility boiler s
» Emission Taxes (Sweden and France)
» New Source Performance Standards (U.S.)
•
Industrial Water Pollution
» Effluent fees (Netherlands)
» Effluent Guidelines and National Pollutant Discharge Eliminations System Permits (U.S.)
•
Leaded Gasoline
» Marketable Permits for leaded fuel production (U.S.)
» Mandatory Lead phase out differential taxes to prevent misfueling (most of Europe)
•
Chlorofluorocarbons (CFCs)
» Permit Market (U.S.)
» Mandatory Phase Out (Other Industrial Countries)
•
Chlorinated Solvents
» Source Regulation (U.S.)
» Three Distinct Policies (Germany, Sweden, Norway)
Evolution of the Policy
• In the 1970s, CAC approach was predominant.
• Policymakers switched over to a more EI policy
sometime between the 1970s &1990s.
– Could be because they were more aware
– Also, it could be because tradable emissions permits
in the 70s came into existence
– Could just be disappointment in CAC regulations
The Two Sides of the Pond:
Comparisons
• The United States is a single federal body
whereas the European Union is multiple
countries.
• Differences in pre-regulatory studies
undertaken.
• U.S. EPA is required to conduct a Regulatory Impact Study
before taking action. So, it is easier to determine the possible
benefits.
• Environmental Taxes are virtually nonexistent in
the U.S.
• Europe uses regulatory taxes more often.
Testing the Hypothesis
• What’s the Best Approach?
• The authors compiled 12 most commonly
used hypotheses.
• Then they focused on the five that they felt
were the most important.
1) EI More Efficient than CAC
• There is a perceived efficiency of EI over
CAC. Not Air Tight case though.
• EI is more cost effective at given emissions
reduction.
• However, efficiency requires a system of perfect
competition and emissions are not location specific.
• In the US for instance:
– EI achieved substantial cost savings in elimination of
CFCs, and lead in gasoline
– lowered SO2 emissions & realized costs are 1/2 of
expectations in 1990 and a 1/4 of expected CAC cost.
– However where EI are too strict, EI do not achieve cost
savings over CAC
2) EI Gives Continual Incentive
for New Technology
• EI is sometimes favored because it seems
not to hamper technology in the same way
as CAC.
– E.g. in Sweden, the NOx tax caused
experimentation in boilers
• U.S. research shows that CAC only
encourages cost-reducing innovation,
while EI causes cost-reducing and
emission reducing innovation.
3) CAC policy achieves objectives
quicker & w/ more certainty
• In the 1970s, CAC was effective in causing quick compliance in
some cases.
– Solvent Trichloroethylene (TCE) phase out resulted in little participation
w/ EI aspects in the U.S.
– Europe needed to use CAC in addition to Tax Differentials to achieve
any progress by:
» Mandating Catalytic Converters
» Maximum Lead Content
• On the other hand EI was effective:
– In Holland, the influence of effluent fees (a EI) on organic waste load
reductions was prompt and large.
• The problem is that both policies can have undesirable long term
effects.
– Regulated new coal power plants just extend the life of older non-regulated ones.
– In Sweden, TCE users gained multiple waivers.
4) Regulated Industry prefers CAC
• EI has lower social costs, but has higher costs to
the firms
• In many industries, the firm pays the cost of
abatement plus a fee for the remaining pollution
it discharges.
• In reality, nearly all governments eliminate the
burden of the EI instruments by returning fees to
the firm
• France subsidized the firms’ abatement investments on NOx
discharge fees.
• Sweden fees were returned on the basis of the energy they
produced.
• In the U.S., tradable permits have always been given away
rather than auctioned off.
5) CAC have higher
Administration Cost
• EI fees for increased emissions tend to
rise gradually, whereas in CAC a line
separates compliance from violation.
• No clear pattern.
– Both CAC Effluent Guidelines and EI lead
phase down program put higher costs on
EPA.
– US EI SO2 program had low admin. costs.
– Germany CAC SO2 program had roughly
same costs as EI
Conclusions
• EI appears to produce costs savings in
pollution abatement as well as innovation.
• Firms prefer CAC regulation because of a
perceived lower cost to them.
• Today, most policy is a blend of both, and
they have been successful.
• Emissions fell by 2/3 compared to base line
results.