Transcript Regulating externalities - Sauder School of Business

Regulating externalities
SPHA511, John Ries
Externality-based environmental problems
Definition: An externality is a non-priced effect on the
welfare of one agent in the economy resulting from the
activities of another.
• A pulp mill's emissions that damages a fishery
• air pollution caused by automobile exhaust and
industrial emissions
• acid rain caused by coal burning production releasing
SO2
• ozone depletion caused by chloroflourocarbons (CFCs)
which chemicals used for refrigeration, foam
packaging, and aerosol cans
• global warming due to greenhouse gases (carbon
particles from fossil fuel combustion, etc.).
Effects of negative externalities
SMC
externality
$
PMC
MB
Q* Q
quantity
- activities with negative externalities will be carried out at
a level which is too high from a social point of view (and
vice versa for positive externalities).
- the socially optimal level of the activity is greater than zero.
Pollution abatement
SMC
$
SMB
Q*
abatement
In the previous graph, there is too much of the polluting activity (too many
pulp mills, too much driving).
Here, the amount of pollution per unit of activity is being reduced (abated)
(e.g., make cars/pulp mills operate more cleanly).
Why do non-priced effects exist?
• Consider a neighbor who plays disturbing loud
music. The utility the neighbour gets from the
music is $80 and the disutility I get from the
noise is $100. In this situation, the efficient
solution is to disallow the music. In principle, this
can be achieved by negotiation between those
affected by the action. In practice this requires:
– assignment of property rights.
– low transaction costs
Priced effects on third parties
• If I outbid you for a house, my action has
adverse consequences on you. This IS NOT a
market failure. In bidding for the house, the price
system is at work where each of us is conveying
our willingness to pay. Allocational efficiency
requires the house go to the person with the
highest willingness to pay. Third party effects are
“priced” whenever a market is in place that
allows people to trade based on preferences
and costs. Markets require well defined property
rights and low transaction costs.
Policy Solutions
• Solution #1. Internalizing the externality
• Solution #2. Quantity controls or
standards
• Solution #3. Taxes
• Solution #4. Assignment of property
rights and creation of a market
Illustrating Alternative Approaches
of Pollution Reduction
Marginal cost of reducing emissions by 1000 ppm
(evaluated at different levels of emissions)
7000
6000
5000
4000
Junker car
(A)
$90
$110
$130
$150
New car
(B)
$55
$75
$95
$115
• Standard = 5000 ppm
• Tradeable permits: Permits to pollute to 5000 ppm
to each driver.
• Tax = $100 per 1000 ppm of emissions.
The London congestion charge
• What facts motivated the new policy?
• What were practical difficulties associated
with congestion charges?
• What program was adopted in 2003?
• What are the benefits?
• How are payments made?
• How were violators detected?
• What were the measured impacts?
B.C. carbon tax first in North America
• How does the 2008 B.C. provincial budget address
climate change?
• What does it mean to be a “consumer-based tax”?
• What will happen to the revenues?
• Will B.C. residents be financially better off or worse
off?
Who bears the cost of a tax?
Producer pays
Consumer pays
MC+tax
$
MC
MC
P’
P
P’
P
MB
MB
MB after tax
Q
Both consumer and producer pay the same share of the costs regardless of who
pays the tax. The share depends on the slopes. Consumers pay high share if
demand steep (inelastic).
Greenhouse gases (GHG)
• What are greenhouse gases?
• What are the sources of GHG emissions?
• What are the consequences?
GHG concentration up
Global warming
• Global surface temperatures have increased about
0.74°C (plus or minus 0.18°C) since the late-19th
century... The warming has not been globally uniform.
Some areas (including parts of the southeastern U.S.
and parts of the North Atlantic) have, in fact, cooled
slightly over the last century. The recent warmth has
been greatest over North America and Eurasia between
40 and 70°N. Lastly, seven of the eight warmest years
on record have occurred since 2001 and the 10 warmest
years have all occurred since 1995.
http://www.ncdc.noaa.gov/oa/climate/globalwarming.html#q3
Rising sea levels
• Global mean sea level has been rising at an average
rate of 1.7 mm/year (plus or minus 0.5mm) over the
past 100 years, which is significantly larger than the
rate averaged over the last several thousand years.
http://www.ncdc.noaa.gov/oa/climate/globalwarming.html#q3
“Montreal Climate Forum
a Struggle for Consensus”
• What is the purpose of the forum and who are the
participants?
• What are the consequences of global warming on the
environment?
• What are some of the evidence that exists on global
warming?
• What is the Kyoto Protocol and its commitments? What
important country has not ratified it?
• What countries are meeting their commitments and what
countries are not?
Hopes Fade for Comprehensive Climate Treaty
New York Times, October 20, 2009
•
•
•
Negotiators have accepted as all but inevitable that representatives of the
192 nations in the talks will not resolve the outstanding issues in the brief
time remaining before the Copenhagen conference opens in midDecember. The gulf between rich and poor nations, and even among the
wealthiest nations, is just too wide.
So officials are now narrowing expectations and defining the areas where
there is agreement, such as the need to halt and then reverse the growth of
greenhouse gas emissions, although how and by whom remains the subject
of intense dispute. Negotiators are also discussing what form any
declaration that emerges from Copenhagen might take and how to ensure
that any promises made there are kept.
Among the chief barriers to a comprehensive deal in Copenhagen is
Congress’s inability to enact climate and energy legislation that sets binding
targets on greenhouse gases in the United States. Without such a
commitment, other nations are loath to make their own pledges.
Trading in pollution
• What are the environmental
consequences of S02 emissions? Do they
generate negative externalities?
• Why type of program was set up in the
U.S.? Was it successful?
• How were emissions monitored?
• What are characteristics of markets where
tradable permits have not been so
successful?
Carbon neutrality in BC
• “On November 20, 2007, the Greenhouse
Gas Reduction Targets Act made B.C. the
first jurisdiction in North America to make
a legally binding commitment to carbon
neutral operations.”
http://www.livesmartbc.ca/government/neutral_action_reports.html
• How do you achieve carbon neutrality?
Carbon neutrality
• “Carbon neutrality involves measuring
operational GHG emissions, reducing
those where possible, offsetting the
remainder and demonstrating leadership
through public reporting.”
• Who provides offsets?
Offset providers
• The Pacific Carbon Trust has been set up to purchase
carbon offsets ($25/ton).
• Offsets or carbon savings are generated from changes
made to avoid or absorb (sequester) carbon dioxide, or
any of the main greenhouse gases. Typically these
GHG-reducing activities fall under three categories:
– Renewable energy, such as run-of-river hydro power generation;
– Energy efficiency, such as industrial energy efficiency or
switching from oil to natural gas; and
– Emissions storage or sinks, such as afforestation (forestation of
land not previously forested).
Demise of the cod fishery on the
Grand Banks off Newfoundland
• Most of the fishery lies in Canada's
territory (12 mile limit extended to 200
miles in 1977) but some is in
international waters.
• Mismanagement by Canada and the
North Atlantic Fishing Organization led
to near extinction of the cod stock (see
chart). The cod fishery was closed in
1992.