Transcript Slide 1

Policy for Market failure
Prescriptive/Command and
Control Strategies:
“Standards”
Instrument taxonomy
Early environmental policies, such as the Clean Air Act of 1970 and the
Clean Water Act of 1972, relied almost exclusively on the command and
control (standards) approach. (Stavins, 1998)
Types of standards
1.Performance standard: a regulation
prescribing a maximum allowable pollution
level. Two common forms:
a)Emissions rate: a never exceed level for a
quantity of emissions from a polluter
• E.g. emissions/year; emissions/(unit of input);
emissions/(unit of output)
b)Ambient concentration: a never exceed level
for a pollutant in the environment
• E.g. TMDLs (Total Maximum Daily Loads of
contaminants in streams and rivers)
Types of standards
2. Technology based standard: a regulation
prescribing specifying the method
(sometimes the actual equipment) that
firms must use.
• 1977 Clean Air Act
Amendments: new
electric power plants
required to install
scrubbers to reduce
SO2 in flue gas (K&O p.
130)
• catalytic converter
required on
automobiles to reduce
concentrations of
emissions
EPA Sets Thresholds for Greenhouse
Gas Permitting
• July 2011: Clean Air Act permitting requirements
for GHGs will kick in for large facilities
• all new facilities with GHG emissions of at least
100,000 tpy and
• modifications at existing facilities that would
increase GHG emissions by at least 75,000 tpy
• permits must demonstrate the use of best
available control technologies to minimize
GHG emission increases
Summary of conclusions on
standards in policy
• Initially appear simple and straightforward
• Potential weaknesses:
– Lack of short- and long-run cost effectiveness
• Limited flexibility in achieving goals
• Weak incentive for innovation
– may lock in particular technologies
• Potential advantages:
– monitoring and enforcement costs
– avoiding “hotspots”
Basic model of standards
• Initial emissions, e1
(standard pollution control model)
• Impose a standard
of a maximum of
e* tons/year
emitted
• What area
represents the total
abatement cost at
e*? Total
damage?
c
b
Example: Clean Air Act of 1970
• Required that costly scrubbers be used by coalfired electricity plants even though it would have
been cheaper to achieve SO2 reductions by
substituting to low sulfur coal.
• Imposed by senators from eastern states with
high sulfur coal.
• Political feasibility: could not otherwise have
passed congress.
Hackett, S., Environmental and Natural Resources Economics: Theory, Policy, and the Sustainable Society, 3rd
Edition (New York: M.E. Sharpe, 2006), p. 224.
Empirical evidence of standards
inefficiency (Stavins, 1998)
Survey of 8 empirical studies
of air pollution control:
– ratio of
• aggregate costs of the
conventional, command-and-control
(C&C) approach
…OVER…
• the aggregate costs of least-cost
(LC) benchmarks
TACC&C/TACLC
Ranged from:
• 1.07 for sulfate emissions in the
Los Angeles area to
• 22.0 for hydrocarbon emissions
at all domestic DuPont plants
www.tva.gov/
Incentives generated by standards
(long-run impacts)
• Technology innovation
– Conceptual model: + demand for abatement tech. +
R&D  + technology innovation  MAC curve falls
– Standards: tend to freeze development of
technologies which would lead to greater levels of
control.
• Especially technology standards
– Little or no financial incentive to exceed control targets
(Stavins, 1998)
• A business that adopts a new technology may be "rewarded"
by being held to a higher standard of performance
Use the basic model to examine incentives for
innovation
• Start: MAC1 … innovationMAC2
Questions:
•Given a mandated standard of
e2 (assume compliance is
perfect)
– What level of abatement does the
firm choose? (Under MAC1?
MAC2?)
– What is the firm’s TAC (total
abatement cost) at this level?
– What is the incentive (the benefit to
the firm) to innovating?
•The new (post-innovation)
socially efficient level of
emissions is e3,
– What happens to R&D incentive if the
firm believes the post-innovation
standard will be set to e3?
When might standards be preferable?
• Hotspots: simple market-based instruments may allow
for areas of particularly high pollution levels to arise
which is problematic for some emissions (e.g. mercury).
• A certain control technology may be so effective and
widely available that mandating it is more effective than
regulating “emissions” (e.g. double-hulled oil tankers –
may also be a high cost of cleanup and difficulty in
recovering damages).
• Too costly to effectively monitor emissions (e.g. catalytic
converters on automobiles).
Economics of standards:
Should standards be uniform?
• Standards are often uniform (identical across
firms).
• The central issue in assessing the cost
effectiveness of standards
– Typically firms will have different MAC functions
• Uniform standard will not be cost-effective
– Could achieve greater reduction at same total cost, or
– Could achieve same reduction at reduced total cost
Cost effective pollution control:
Minimizing costs
What does the
area described by
c represent?
K&O, figure 9.1
Arguments…
For uniform standards:
• Lower implementation costs (likely lower than for nonuniform standards)
– to get non-uniform standards right, you need the MAC function for
every source – a costly information requirement
• equity (treats everyone alike…which is not necessarily
always a fair or equitable approach)
– “leveling the economic playing field”
Against uniformity:
• When marginal abatement costs differ among sources
– Uniformity is not cost-effective (assuming MAC curves known or
“easy” to assess)
– Equity and leveling the economic playing field don’t necessarily
imply equal standards.