Transcript Economics of Environmental Policy Environmental Policies Decentralized Policies  Liability Laws and Property Rights  Moral Suasion Command and Control  Emission Standards  Technology Standards Incentive-Based Policies 

Economics of
Environmental Policy
Environmental Policies
Decentralized Policies
 Liability Laws and Property Rights
 Moral Suasion
Command and Control
 Emission Standards
 Technology Standards
Incentive-Based Policies
 Emission charges
 Subsidies
 Tradable discharge permits
Criteria for Evaluating Policies
 Efficiency
 Cost Effectiveness
 Fairness
 Incentives for Technological Improvements
 Enforceability
 Morality
Efficiency
Maximum net benefits
 Requires balancing MAC and MD
Decentralized……………….Centralized
 Hayek’s critique
Rational central
planning is impossible
Cost Effectiveness:
When damages (benefits) can’t easily be measured
Garden of Eden
Adam
Eve
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Adam and Eve in the Garden of Eden, by Titian (c. 1550)
Which allocation would you choose?
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2.
3.
4.
5.
Choice
Choice
Choice
Choice
Choice
One
Two
Three
Four
Five
Adam
Eve
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Tradeoff: Efficiency vs. Fairness ?
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Fairness
 Distribution of benefits/costs across regions,
incomes, race, etc
Distribution of Net Benefits
Program
Total Cost
Total
Benefits
Net
Benefits
Low
Income
High
Income
A
50
100
50
25
25
B
50
100
50
30
20
C
50
140
90
20
70
D
50
140
90
45
45
If you could impose any of the four Programs,
which would you choose?
Program
Program
Program
Program
a)
b)
c)
d)
A
B
C
D
Distribution of Net Benefits
1
Total
Benefits
Net
Benefits
Low
Income
High
Income
A
50
100
50
25
25
B
50
100
50
30
20
C
50
140
90
20
70
D
50
140
90
45
45
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0%
0%
0%
ra
m
Pr
A
og
ra
m
Pr
og B
ra
m
Pr
og C
ra
m
D
Total Cost
Pr
og
Program
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If your choices were limited to Program C or
Program A, which would you choose?
1. Program A
2. Program C
Distribution of Net Benefits
1
A
50
100
50
25
25
B
50
100
50
30
20
C
50
140
90
20
70
D
50
140
90
45
45
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12
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0%
C
High
Income
ra
m
Low
Income
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Pr
og
Net
Benefits
A
Total
Benefits
ra
m
Total Cost
Pr
og
Program
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Incentives for Technological Improvements
 Shift the MAC curve down
MAC1
MD1
MAC2
E2
E1
E0
Emissions
Incentives for Technological Improvements
 Incentives for private sector to innovate
 Profit motive
 New ideas are a public good
 undersupply problem
 Pollution Control industry: “envirotech”
 Driven by regulations and profit motive
Enforceability
Enforcement is costly
 Reliance on self-reporting
 Monitoring
 Sanctioning
 Courts
 Fines
 Paradox of the Reluctant Enforcer
Moral Considerations
Right vs. wrong
Taxes vs. Subsidies vs. Permits
The Animal Liberation Front (ALF) carries out direct
action against animal abuse in the form of rescuing
animals and causing financial loss to animal exploiters,
usually through the damage and destruction of property.
Decentralized Policies
Liability Laws
Property Laws
Voluntary action
Liability Law
Polluters must compensate those harmed
 Provides incentive to make careful decisions
 “internalize the externality”
Which of the following situations would provide a
system of liability rules the best chance for generating
an efficient level of emissions?
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d)
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c)
c)
b)
b)
many people are involved, causal links are
clear, and damages are difficult to
measure.
few people are involved, causal links are
clear, and damages are difficult to
measure.
many people are involved, causal links are
muddy, and damages are easy to
measure.
few people are involved, causal links are
clear, and damages are easy to measure.
a)
a)
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20
Liability Law…
$
MAC1
MD1
d
b
c
E*
E0
Suppose firm is liable for pollution damages
 At E0: TD = b + c + d
 Reducing emissions reduces Damage Liability (saves “c+d”)
 Reducing emissions increases Abatement Costs (costs “c”)
 Threat of lawsuit could encourage optimal emissions
Emissions
Common Law
 Legal Doctrines
 Strict Liability
 Liable for damages regardless the circumstances
 Negligence
 Liable only if appropriate precautions are not taken
 Burden of Proof?
 Burden is on victims
 Statute of limitations
 Standard of Proof?
 Direct causal link must be established
 Difficult given the probabilistic nature of many
exposures
Examples
 Smoking “causes” cancer?
 Exxon Valdez “caused” shoreline damages?
 Particular power plant “caused” SO2 damages?
 Best Case Scenario for Common Law
Few people involved, causal link is clear, damages
easily measured
Under a system of negligent liability, a firm
disposing hazardous materials into a river would:
be liable for any damages regardless
of the circumstances.
be liable for any damages only if the
firm did not take reasonable steps to
avoid damage.
not be liable for any damages.
none of the above.
c)
d)
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Statutory Law
 Legislative enacted laws
 Tax-financed victim’s fund (Netherlands)
 Law for the Compensation of Pollution-Related
Health Injury (Japan)
 CERCLA (US)
 Example: #4 from Problem Set
In March a small dump truck overturned in Marietta, Ohio, littering the street with cow
parts. A smaller shipment fell off of a truck on the same street the following week,
running the total of cow-parts spills to four within a year. Said City Councilwoman
Katie McGlynn, "I would just like to know why this continues to happen. Maybe we
need a stronger ordinance to make this a more serious crime."
[Marietta Times, July 1993]
4. Accidents with trucks carrying cow renderings are fairly common in
Marietta. Suppose regulators enact a rule requiring that the
perpetrators of such an accident be liable for a sum equal to the
average damages of all such accidents in the industry. Would this lead
trucking companies to take the socially efficient amount of precaution
against such accidents? Explain.
Property Rights
Coase Theorem
 If property rights are well-defined and
transactions costs low, then private
bargaining will lead to an efficient allocation
of resources
 Corollary: efficient allocation does not depend
on initial allocation of property rights
 Conditions
 “well-defined” property rights
 low transactions costs
 complete markets
Ronald Coase
1991 Nobel Prize in Economics
6. A factory's production process creates sludge which pours into a river. This
sludge makes it difficult to fish in the river, increasing the costs of the local
fishermen by $6000. The factory can install a water filter system for $4500,
and the fishermen can utilize a weighted fishing net system (to get under the
sludge) for $3750. Both systems would remedy the sludge damage to the
fishermen.
a) Suppose transactions costs are zero. If the factory is not liable and can
continue to produce sludge, what outcome do you predict and why?
b) Suppose transactions costs are zero. If the factory is assigned liability for
sludge damage, what outcome do you predict and why?
c) Now suppose transactions costs preclude the possibility of private bargaining
between the factory and fishermen. If a pollution tax is levied on the factory
with the proceeds given to the fishermen, then what outcome do you predict
and why?
d) How do your answers to parts (a), (b), and (c) change if the cost of the water
filter system was $3500?
e) Discuss the results of parts (a), (b), (c), and (d) in terms of the Coase Theorem.
Voluntary Action
Moral suasion
Informal community pressure
Command and Control Policies
 Mandate behavior coupled with enforcement
 Examples
 Speed limits
 Minimum age restrictions
 Minimum wage
 Why are standards popular?
 Simple and direct
 Moral appeal
Ambient Standards
 Never exceed level of a pollutant in
ambient environment

DO can not fall below 3ppm
 Expressed in terms of average
concentration over time

SO2:
80 μg/m3 annual;
365 μg/m3 daily
 Can’t be enforced directly; must monitor
emissions that lead to AQ levels
Emission Standards
Never exceed levels applied directly to
quantities of emissions
Expressed in terms of quantity per time
 Tons per week
 Grams per hour
Emissions  Environment  AQ
Meteorlogical
Hydrological
Human decisions
Technology Standards
 Mandated technologies, techniques, and
practices
 Examples
 seat belts
 catalytic converters
 Scrubbers/baghouses
Emission Standards
Applicable to New
Snowmobiles
Carbon Monoxide
g/kw-hr
Hydrocarbons
g/kw-hr
2005
397
150
2006/2007
275
100
2010
275
75
2012
200
75
Yellowstone 2005
120
15
Yellowstone Entry Standards
Clinton 2003
Bush
Noise Standards for
Yellowstone
Number of Snowmobiles Allowed
(vehicles/day)
0
720
Decibels
Yellowstone
73 db
Elsewhere
None
Economics of Standards
 Setting the standard
 Should EPA consider damages and abatement costs?
$
MAC
Et
 Zero-Risk?
 Reasonably small level?
 Efficient level?
MD
E1
E*
E0
Emissions
 tradeoffs made by using avg. concentration levels over time
Uniformity of Standards
 Geographic differences: MDu > MDr
 Single standard can’t be efficient
$
MDu
MAC
MDr
Eu
Er
 tradeoff: regulatory costs vs efficiency gains
E0
Emissions
Incentives for Improvements
 Technology Standards: no incentive
 All or nothing!
 Emission Standards: some incentive
 Polluters seek to reduce abatement costs
 Remember: pollution control R&D carried out by
pollution-control industry rather than polluting
industries themselves
MAC1
$
MD
MAC2
e
d
a
c
b
Emissions
E2
With MAC1: cost at E1 = a + b
With MAC2: cost at E1 = b
E1
E0
If E1 is the standard, then the incentive
for R&D = a
“cost savings”
If standard is changed to E2 as new technology is adopted, then incentive
to innovate is (a – c)
Technology Forcing: If standard is set at E2 from the start then incentive to
Innovate is (a + d + e)
Input Standards or Output Standards?
Total
Emissions
Total
= Output
X
Inputs used
per unit of
output
X
Emissions
per unit of
input
E = [Q] x [Inputs/Q] x [E/Inputs]
Auto Emissions = [# Vehicles] x [Miles/Vehicle] x [Emissions/Mile]
Emission Standards
“end of tail pipe”
Economics of Enforcement
Monitoring & Sanctioning Costs
MPC = Marginal Penalty Curve = P x F x E
$
MAC
MPC*
MPC1
P = probability of detection
F = monetary fine
E = emissions
P = 0.25
F = $100/E
E = 10,000
MPC = (.25)(100)(10,000)
= $250,000
E*
E1
E0
 With MPC1, firm only cuts back to E1
 To get to E*, must raise MPC1 to MPC*
 Raise P
 Raise F
Emissions
How do Standards Hold Up?






Efficiency
Cost Effectiveness
Fairness
Incentives for Technological Improvements
Enforceability
Morality
Incentive-Based Strategies
Emission Taxes
Emission Subsidies
Emission Taxes




Pigouvian taxes
Government sets tax = $t per unit of emissions
Polluter has incentive to reduce emissions until MAC = t
Standard at E1 would only cost firm area "b"; much less
than the tax
$
MAC
Tax bill
t
Abatement Cost
b
E1
E0
Emissions
Optimal Tax
 Optimal t* occurs where MD = MAC
MD
Reduced damages = e + f
MAC
Remaining damages = b + d
Tax cost = a + b + c + d
[Tax revenues are not included
in social cost calculation]
f
t*
c
a
d
Two-part tax?
Allow E1 emissions free
Apply t* to anything above E1
Tax payment = c + d
e
b
E1
E*
E0
If MD is unknown, use iterative process:
If AQ doesn’t improve  raise t
If AQ improves too much  lower t
Suppose that society's marginal abatement cost function is given
by MAC = 50 - 2E and society's marginal damage function is
given by MD = 3E. What is the optimal level of pollution
emissions?
50
30
20
10
5
d)
e)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
0%
30
50
0%
15
0%
16
0%
17
0%
5
c)
10
b)
20
a)
18
19
20
According to the situation above, what would be the
optimal per unit pollution tax?
$50
$40
$30
$20
$10
a)
b)
c)
d)
e)
1
2
3
4
5
6
7
8
9
10
11
12
13
0%
0%
50
40
14
15
0%
0%
0%
30
20
10
16
17
18
19
20
Efficiency
 Uniform Emissions
 Equimarginal principle is satisfied
 efficiency results possible even though agencies may know nothing
about MAC at sources (unlike standards, where agencies must know
MAC)
 Non-Uniform Emissions
 single tax not fully efficient: deals with differences in MAC, but not
differences in MD
 1 unit reduction by Firm B is better than 1 unit reduction by Firm A
Firm A
Firm B
Zoned Taxes?
 Warning: reducing emissions through one
medium may increase emissions elsewhere
Incentive to Innovate
MAC1
MAC2
t*
c
a
With tax t*:
b
E2
d
e
E1
E0
MAC1: Cost = (d + e) + (a + b + c)
MAC2: Cost = (b + e) + (a)
Cost savings = c + d
Recall: cost savings for standard
at E1 was only d.
Enforcement and Examples
 Enforcement costs
 Higher monitoring requirements compared to standards
 Non-point sources are difficult to monitor/tax
 Revenues give regulators incentive to monitor
 Examples
 CO2 taxes: Scandinavia
 State emission fees for criteria pollutants
South Coast AQMD
For emissions in Calendar Year 2008
Annual
Emissions
(tons/yr)
Organic
Gases
($/ton)
Specific
Organics
($/ton)
Nitrogen
Oxides
($/ton)
Sulfur
Oxides
($/ton)
Carbon
Monoxide
($/ton)
Particulate
Matter
($/ton)
4 – 25
$517.08
$92.52
$302.52
$358.65
--
$395.41
> 25 – 75
$839.53
$146.58
$480.53
$579.77
--
$640.70
> 75
$1,2568.68
$219.87
$723.70
$870.45
--
$959.28
> 100
--
--
--
--
$6.18
--
Source: South Coast AQMD, Rule 301, Table III. Available at http://www.aqmd.gov/rules/reg/reg03/r301.pdf
Enforcement and Examples
 Enforcement costs
 Higher monitoring requirements compared to standards
 Non-point sources are difficult to monitor/tax
 Revenues give regulators incentive to monitor
 Examples
 CO2 taxes: Scandinavia
 State emission fees for criteria pollutants
 tax on cars to control auto emissions
total emissions per year = (E/mile) x (# miles per year)
 Gasoline taxes
Federal tax is 18.4 cents per gallon
Source: http://www.factsonfuel.org/gasoline/index.html
More examples…
 Non-point sources
 Agricultural runoff
 pesticides
 fertilizer
Tax the input,
rather than output
 Distortions?
 Trash stickers
 pack more garbage into each bag
 tax on house windows
Distributional Concerns
 Regulatory costs may be passed on
 to consumers through higher prices
 to workers through reduced employment (and lower
wages)
S2
$
S1
P2
P1
D1
Q2
Q1
Quantity
Subsidies
 Types
 technology subsidies
 abatement subsidies
 while emissions per firm may go down, new firms may
be attracted to the industry!
 Examples:
 deposit refund systems:
 Cars
 Batteries
 Bottles/cans
 Tax credits
5¢: CA, CT, DE, HI, IA, ME, MA, NY, OR, VT
10¢: MI
Current Models
Make
Model
Estimated Tax
Credit
Chevrolet
Malibu Hybrid
$1,300
Chevrolet
Tahoe Hybrid
$2,200
Ford
Escape Hybrid (2wd)
$3,000
Ford
Escape Hybrid (4wd)
$2,200
GMC
Yukon Hybrid
$2,200
Honda
Civic Hybrid (auto)
$2,100
Lexus
RX 400h
$2,200
Lexus
GS 450h
$1,550
Mercedes
GL 320 Bluetec (clean diesel)
$1,800
Mercury
Mariner Hybrid (2wd)
$3,000
Nissan
Altima
$2,350
Vue Green Line
$
Saturn
Aura Green Line
$1,300
Toyota
Camry Hybrid
$2,600
Toyota
Highlander Hybrid
$2,600
Toyota
Prius
$3,150
Volkswagen
Jetta TDI (clean diesel)
$1,300
Saturn
650
http://www.hybridcars.com/federal-incentives.html
Pollution Worksheet
 Marietta-Parkersburg area emissions:
 Current emissions = 90,000 units
 Optimal emissions = 60,000 units
 Marginal Abatement Cost
 Cars: $5
 Utilities: $10
 Factories: $20
 Controlling pollution through:
 Standards
 Taxes
 Tradable Permits
Standards
Set a maximum emissions of 20,000 units per source:
SOURCE
EMISSIONS
EMISSIONS
ABATED
ABATEMENT
COSTS
CARS
20,000
0
0
UTILITIES
20,000
10,000
$100,000
FACTORIES
20,000
20,000
$400,000
60,000
30,000
$500,000
TOTAL
Standards
Require each source to cut emissions by 10,000 units:
SOURCE
EMISSIONS
EMISSIONS
ABATED
ABATEMENT
COSTS
CARS
10,000
10,000
$50,000
UTILITIES
20,000
10,000
$100,000
FACTORIES
30,000
10,000
$200,000
60,000
30,000
$350,000
TOTAL
Standards
Require each source to cut emissions by 1/3:
SOURCE
EMISSIONS
EMISSIONS
ABATED
ABATEMENT
COSTS
CARS
13,333
6,667
$ 33,335
UTILITIES
20,000
10,000
$100,000
FACTORIES
26,667
13,333
$266,660
60,000
30,000
$399,995
TOTAL
Standards
Cost-minimizing strategy of reducing emissions by 60,000 units.
SOURCE
EMISSIONS
EMISSIONS
ABATED
ABATEMENT
COSTS
0
20,000
$100,000
UTILITIES
20,000
10,000
$100,000
FACTORIES
40,000
0
0
60,000
30,000
$200,000
CARS
TOTAL
“$200,000 Solution”
Taxes
A tax of t = $6 per unit of pollution is imposed:
SOURCE
EMISSIONS
ABATED
ABATEMENT
COSTS
TAX COSTS
0
20,000
$100,000
0
UTILITIES
30,000
0
0
$180,000
FACTORIES
40,000
0
0
$240,000
70,000
20,000
$100,000
$420,000
CARS
TOTAL
EMISSIONS
Taxes
A tax of t = $11 per unit of pollution is imposed:
SOURCE
EMISSIONS
EMISSIONS
ABATED
ABATEMENT
COSTS
TAX COSTS
CARS
0
20,000
$100,000
0
UTILITIES
0
30,000
$300,000
0
40,000
0
0
$440,000
40,000
50,000
$400,000
$440,000
FACTORIES
TOTAL
Tradable Permits
S
$
$20
F
Abatement Cost
U
$10
P = $10
Q = 60,000
$5
Auction
Revenue
40
C
D = MAC
60
70
90
permits
“$200,000 Solution”
Tradable Discharge Permits
 TDPs rely on decentralized cooperation
 Central authority sets aggregate # permits (CAP)
 Each polluter is allocated certain number of
emission permits
 Each permit allows 1 ton of SO2
 Polluter must then make a choice:
Reduce emissions to level covered by allocated
permits
Reduce emissions below original permit level,
then sell excess permits
Buy additional permits (to enable expanded
production)
Permit Market
 Buyers
 New firms
 Existing firms looking to
expand
S
$
P*
 Sellers
 Firms leaving area/industry
 Those who’ve invested in
efficient technology
D
Q*
Permits
Permits flow from low MAC polluters
to high MAC polluters so as to satisfy
equimarginal principle
2008 Spot Auction
2008 7-yr Advance Auction
Trading Rules
 Should be simple and clear to minimize
uncertainty
 Initial Permit Allocation?
 Equal allocation?
 Ignores differences in firm size
 According to existing emissions?
 Ignores that some firms have already cut emissions
 Give away or auction?
 Coase Theorem
Trading Rules…
Who may participate?
 Local, regional, national, international
polluters?
 Environmental groups?
 Speculators?
How will trades take place?
 Sealed bids for annual EPA auction
 Brokers are used for secondary markets
 Do regulators have veto power?
Potential Problems
 Market power
 Thin markets
 Permit life span
 Hot spots (non-uniform emissions)
 Tradeoff: competitive markets vs. enviro damage
Urban Area
“transfer coefficient”
B
A
C
D
Prevailing
Wind
Enforcement
 EPA must monitor:
 Number of permits in possession of each polluter
 CBOT
 Quantity of emissions from each source
 Incentive for polluters to monitor each other to prevent
cheating (reduces demand for permits)
Incentives for Innovation
$
Permit price = $50
$200
MAC1
MAC1 = 200 - 2E1
MAC2 = 100 – E2
$100
MAC2
$50
c
a
TAC with MAC1 = d + e = $625
d
e
b
50
75
TAC with MAC2 = b + e = $1250
Revenue from TDP = b + c = $1250
Cost Savings =
(d+e) – (b+e) + (b+c) = d + c = $625
Cost savings as good as emission taxes
100
emissions
Which of the following is a criterion for
evaluating environmental policies?
efficiency
fairness
incentives to improvements
enforceability
All of the above
ss
im
pr
ov
...
en
fo
rc
ea
bi
A
lit
ll
of
y
th
e
ab
ov
e
irn
e
fa
fic
i
en
cy
20% 20% 20% 20% 20%
in
ce
nt
iv
es
to
ef
a)
b)
c)
d)
e)
Private bargaining can lead people to the efficient
outcome if
a)
b)
c)
d)
transactions costs are low and
property rights are well defined
transactions costs are high and
property rights are ill defined
transactions costs are high and
property rights are well defined
transactions costs are low and
property rights are ill defined
0%
a)
0%
0%
b)
c)
0%
d)
The two defining features of command-andcontrol regulation are
a)
b)
c)
d)
cost-effectiveness and flexible
standards
pollution taxes and marketable permits
uniform standards and technologybased regulations
monitoring and compliance
0%
a)
0%
0%
b)
c)
0%
d)
Emission taxes are generally regarded as
efficient since
a)
b)
c)
d)
they raise the maximum amount of
revenue possible for the IRS
they encourage all pollution sources to
completely eliminate their emissions
they require environmental regulators
to know the individual source marginal
abatement
they encourage all pollution sources to
adjust their emissions so that the
equimarginal principle is satisfied.
0%
a)
0%
0%
b)
c)
0%
d)
Emission taxes are more likely to be effective
when applied to
a) nonpoint sources of pollution
b) point sources of pollution
0%
a)
0%
b)
Marketable pollution permits require a slightly more complex
system when there are geographic differences in pollution
effects. One possible approach to designing a system of
permits would be to:
a)
b)
c)
d)
use technology-based standards in
conjunction with the permits
auction off the permits one-by-one
over time until all permits have been
allocated
simply give the permits away to
polluters based on their historic
emissions rate
establish separate markets for each
subregion
0%
0%
0%
a)
b)
c)
0%
d)