pollution control: instruments control... · cost efficiency and cost-effective pollution abatement...
Post on 28-Jul-2018
228 Views
Preview:
TRANSCRIPT
Pollution control:
instruments
Cost efficiency and cost-effective pollution abatement instruments
• Suppose a list is available of all instruments which are capable of achieving some
predetermined pollution abatement target.
• If one particular instrument can attain that target at lower real cost than any other can
then that instrument is cost-effective.
• Cost-effectiveness is clearly a desirable attribute of an instrument.
– Using a cost-effective instrument involves allocating the smallest amount of
resources to pollution control, conditional on a given target being achieved.
– It has the minimum opportunity cost.
– Hence, the use of cost-effective instruments is a prerequisite for achieving an
economically efficient allocation of resources.
Least-Cost Principle
• A necessary condition for abatement at least cost is that the marginal cost of abatement
be equalised over all abaters - known as the least-cost theorem of pollution control -
illustrated in Figure 6.1.
• A least-cost control regime implies that the marginal cost of abatement is equalised over
all firms undertaking pollution control.
• A least-cost solution will in general not involve equal abatement effort by all polluters.
• Where abatement costs differ, cost efficiency implies that relatively low-cost abaters
will undertake most of the total abatement effort, but not usually all of it.
5 10 15 35 40302520
Pollution abatement, Z
Z
MCA = 3ZA
MC
MCB = 3ZB
75
100
200
Figure 6.1 Marginal abatement cost functions for the two firms
Instrument category
Institutional approaches to
facilitate internalisation of
externalities
Command and control
instruments
Economic incentive (market-
based) instruments
Classification of pollution control instruments
Instrument category Description
Institutional approaches to facilitate internalisation of externalities
Facilitation of bargaining Cost of, or impediments to, bargaining are
reduced
Specification of liability Codification of liability for environmental
damage
Development of social responsibility Education and socialisation programmes
promoting ‘citizenship’
Command and control instruments
Input controls over quantity and/or mix of
inputs
Requirements to use particular inputs, or
prohibitions/restrictions on use of others
Technology controls Requirements to use particular methods or
standards
Output quotas or prohibitions Non-transferable ceilings on product
outputs
Emissions licences Non-transferable ceilings on emission
quantities
Location controls (zoning, planning
controls, relocation)
Regulations relating to admissible location
of activities
Instrument category Description
Economic incentive (market-based) instruments
Emissions charges/taxes Direct charges based on quantity and/or
quality of a pollutant
User charges/fees/natural resource taxes Payment for cost of collective services
(charges), or for use of a natural resource
(fees or resource taxes)
Product charges/taxes Applied to polluting products
Emissions abatement and resource
management subsidies
Financial payments designed to reduce
damaging emissions or conserve scarce
resources
Marketable (transferable, marketable)
emissions permits
Two systems: those based on emissions
reduction credits (ERCs) or cap-and-trade
Deposit-refund systems A fully or partially reimbursable payment
incurred at purchase of a product
Non-compliance fees Payments made by polluters or resource
users for non-compliance, usually
proportional to damage or to profit gains
Performance bonds A deposit paid, repayable on achieving
compliance
Liability payments Payments in compensation for damage
Approaches which facilitate voluntary, decentralised internalisation of
externalities : Bargaining
• One approach to achieving emissions, or other environmental policy, targets is to
improve existing social or institutional arrangements that facilitate environmental
damage-reducing voluntary decentralised behaviour.
• Two variants of this approach:
– Improve the effectiveness of property rights regimes in bringing about socially efficient
allocations of resources;
– Encourage greater social responsibility in making choices and taking decisions.
• Each of these two variants shares the characteristic of potentially preventing the
emergence of externalities, or internalising externalities which have arisen.
– In doing so, it is possible that decentralised behaviour by consumers and producers may
generate efficient outcomes and so obviate the need for regulatory intervention.
• In a classic paper, Ronald Coase (1960) explored the connection between property rights
and the likelihood of efficient bargaining solutions to inefficient allocations of
resources.
• Coase proposed that a necessary condition for bargaining between agents to bring about
efficient resource allocation is the existence of a well defined and enforceable allocation
of property rights.
• Coase also showed that efficient bargaining may be hindered by the presence of non-
trivial transactions costs.
Bargaining – The Coasian Solution
Noise
MBZ
MCZ
c
b d
a
Z1Z2 Z3
Limitations to the Bargaining Solution to Pollution Problems
1. Transactions Costs
a) Large numbers of generators and/or sufferers
b) Linkage identification
2. The effect is Public
a) non-excludable
b) non-rival
Difficulties/limitations of bargaining as a solution to externalities problems
1. The likelihood of bargaining taking place is at best low unless well-defined and
enforceable property rights exist.
– For many environmental resources, well-defined and enforceable property rights do not exist.
– An important example is that in which the environmental resource is an open access resource in which
exclusion is impossible except at very high, and possibly prohibitive, cost.
2. Second, bargaining solutions require that the expected gains from bargaining are larger
than the expected costs of carrying out that bargaining.
– Thus, bargaining is facilitated by the existence of a relatively small number of affected parties, and by all such
parties being easily identifiable.
– Again, many environmental problems fail to satisfy either of those properties. Typically, environmental
degradation affects many people and in many cases, as with vehicle pollution, is attributable to a large number
of sources.
– It is often difficult to identify all affected parties, and the transactions costs associated with undertaking a
bargaining exercise can be enormous. Hence where the number of affected individuals is large, the scope for
efficient bargaining behaviour is restricted.
3. Difficulty (or impossibility) of intertemporal bargaining, including bargaining between
current and future generations.
– Often, environmental externalities cut across generations – our behaviour today imposes externalities on future
persons.
– While bargaining between affected individuals at one point in time seems feasible, it is difficult to imagine that
this could happen between representatives of the present generation and those not yet living.
– One would not, therefore, expect that bargaining between directly affected individuals and firms would offer
much prospect of bringing about an efficient response to global climate change, involving as it does many
generations.
Role of government
• If bargaining does offer the prospect of substantial efficiency gains, then government
should facilitate it wherever that is cost-effective.
• It could do so by clearly defining and explicitly allocating property rights where that is
practicable (and ethically acceptable).
• Where environmental problems spill over national boundaries, as in the case of
biodiversity decline or greenhouse gas emissions, further complications arise.
• Government might seek to develop and sustain an institutional structure that maximises
the scope for bargaining behaviour.
• Gains may also derive from government’s taking some responsibility for environmental
monitoring so as to identify pollution producers and recipients, and disclosing
information from this to affected parties.
• Access to the judicial system should be easy and cheap, and also equitable as between
different classes of parties. This will facilitate use of the liability principle.
• in many societies bargaining solutions to resolve disputes are often embedded in long
standing cultural traditions and social norms, and collective choice mechanism operating
within these frameworks.
• the limitations to bargaining do appear to be very substantial, and it would be
inappropriate to place too much reliance on such a mechanism as far as environmental
pollution problems are concerned.
Liability
• The role that may be played by the judicial system in helping to bring about efficient
outcomes has been implicit in our discussion of bargaining.
• That role can be taken a step further. Liability can be used as a means of dealing with
environmental hazards.
• Suppose that a general legal principle is established which makes any person or
organisation liable for the adverse external effects of their actions.
• In effect, property rights are then vested in the party adversely affected by the action
which generates the harm.
• Liability for damage is one mechanism that induces the potential injurer to undertake
the socially efficient level of precaution, Q*, where NMB (MB – MC) I smaximised.
• Two possible versions of the liability principle (there are many others): we investigate
whether they generate the appropriate incentive.
Strict Liability If an accident occurs, the injurer pays
full compensation to the victim
Negligence Liability If an accident occurs, the injurer pays
full compensation to the victim only if
the injurer were not, prior to the
accident, undertaking the efficient level
of precaution. If it were, then the injurer
is not required to pay any compensation
Development of social responsibility
• Pollution problems happen, in the final analysis, because of self-interested but
uncoordinated behaviour.
• Encouraging people – either as individuals or in their roles within organisations - to
behave as socially responsible citizens can help to attain environmental goals.
• Government has limited influence over the cultural context of human behaviour.
• But it would be wrong to ignore the opportunities that exist for using educational
institutions and the mass communications media to help achieve specific targets and to
promote ethical behaviour.
• The evidence that individuals do not exclusively act in a narrowly utilitarian way
suggests that this objective may be more than just wishful thinking.
• Perhaps the strongest evidence is to be found in our family and social lives, where much
of what we think and do has a social – rather than purely self-interested – basis.
• Given this, ‘cultural’ instruments that promote ‘social responsibility’ may be powerful
ways of achieving general environmental goals.
Command and control instruments• The dominant method of reducing pollution in most countries has been the use of direct
controls over polluters.
• This set of controls is commonly known as command and control instruments.
• Figure provides a schema by which these instruments can be classified.
Location of
emissions
Ambient pollution
levels
Emissions output
Production technique
Inputs used
Quantity of goods produced
The pollution process
Zoning
Ambient pollution
requirements
Emissions
licenses
Technology controls
Input restrictions
Output quotas
Command and control instruments
Non-transferable emissions licences
• Suppose that the EPA is committed to attaining some overall emissions target
for a particular pollutant. It creates licences (also known as permits or quotas)
for that total allowable quantity.
– After adopting some criterion for apportioning licences among the individual sources, the EPA
distributes licences to emissions sources.
– These licenses are non-transferable; that is, the licences cannot be transferred (exchanged)
between firms.
– Therefore, each firm’s initial allocation of pollution licences sets the maximum amount of
emissions that it is allowed.
• Successful operation of licence schemes is unlikely if polluters believe their
actions are not observed, or if the penalties on polluters not meeting licence
restrictions are low relative to the cost of abatement.
– Licence schemes will have to be supported, therefore, by monitoring systems and by
sufficiently harsh penalties for non-compliance.
Non-transferable emissions licences
• Under special conditions, the use of such emissions licences will achieve an overall
target at least cost (that is, be cost-efficient).
• But it is highly unlikely that these conditions would be satisfied.
– Cost-efficiency requires the marginal cost of emissions abatement to be equal over all abaters.
– If the EPA knew each polluter’s abatement cost function, it could calculate which level of emissions of each
firm (and so which number of licences for each firm) would generate this equality and meet the overall target.
– It is very unlikely that the EPA would possess, or could acquire, sufficient information to set standards for each
polluter in this way.
– The costs of collecting that information could be prohibitive, and may outweigh the potential efficiency gains
arising from intervention.
– Problem of information asymmetries; those who possess the necessary information about abatement costs at the
firm level (the polluters) do not have incentives to provide it in unbiased form to those who do not have it (the
regulator).
– A system of long-term relationships between regulator and regulated may partially overcome these
asymmetries, but might bring other problems (such as regulatory capture.
• Given all this, it seems likely that arbitrary methods will be used to allocate licences,
and so the controls will not be cost-efficient.
Instruments which impose minimum technology requirements
• Command and control instrument that consist of regulations which specify
required characteristics of production processes or capital equipment used.
• In other words, minimum technology requirements are imposed upon potential
polluters.
• Examples of this approach have been variously known as best practicable
means (BPM), best available technology (BAT) and best available technology
not entailing excessive cost (BATNEEC).
• In some variants of this approach, specific techniques are mandated, such as
requirements to use flue-gas desulphurisation equipment in power generation
or minimum stack heights.
• Sometimes the specific technique adopted is sometimes negotiated between
the EPA and the regulated parties on an individual basis.
Location• Pollution control objectives , in so far as they are concerned only with reducing human
exposure to pollutants, could be met by separating the locations of people and pollution
sources.
• This is only relevant where the pollutant is not uniformly mixing, so that its effects are
spatially differentiated.
• Separation can be done ex ante or ex post.
• Separation ex ante, by zoning or planning control, is relatively common.
– Planning controls and other forms of direct regulation directed at location have a large role to play in the
control of pollution with localised impacts and for mobile source pollution. They are also used to prevent
harmful spatial clustering of emission sources.
• Ex post relocation decisions are rarer because of their draconian nature; examples
include people being removed from heavily contaminated areas, such as Chernobyl.
• Location decisions of this kind will not be appropriate where we are concerned about
wider ecosystem impacts or where pollution is uniformly mixing
Command and Control: assessment
Attractive Properties
• Certainty of outcome
• Ability to get desired results very quickly.
Unattractive Properties
• Likely to be cost-inefficient, as CAC techniques contain no mechanisms to
bring about two desired results:
– equalization of marginal abatement costs over the controlled firms in that programme.
– equalization of marginal abatement costs across different programmes (e.g. Magat et al. (1986)
estimated that the marginal treatment cost of biological oxygen demand (BOD) from US rivers
and lakes varied from as little as $0.10 per kilogram of BOD removal to as much as $3.15).
• Lack good dynamic incentives
Economic incentive (quasi-market) instruments :
Basic Principle
• Incentive-based instruments work by altering the structure of pay-offs that
agents face, thereby creating incentives for individuals or firms to voluntarily
change their behaviour.
• The pay-off structures are altered by changing relative prices. This can be
done in many ways. We focus on two of them:
1. By the imposition of taxes on polluting emissions (or on outputs or activities deemed to be
environmentally harmful), or by the payment of subsidies for emissions abatement (or
reduction of outputs or activities deemed to be environmentally harmful).
2. By the use of tradable emission permit (or allowance) systems in which permits command a
market price. Those prices are, in effect, the cost of emitting pollutants.
• More generally, any instrument which manipulates the price system in such a
way as to alter relative prices could also be regarded as an incentive-based
instrument.
With uniform taxation across discharge sources, the overall reduction is achieved at least cost
MNPB is Marginal Net Private Benefit = MPB – MPC
No tax - Profit maximised where MNPB = 0
With tax – Profit maximised where MNPB = t
Total Cost of pollution reduction = aM1*M1t + bM2*M2
t
There is no re-allocation of pollution reduction as between the two firms that
can reduce the total cost
P2M1
t t
M2t M2*M1
t M1*
a b
MNPB1
MNPB2
Key results• The tax instrument - at rate t - brings about a socially efficient aggregate level of
pollution
• It will also achieve that aggregate target in a cost-effective way.
– Cost-efficiency requires that the marginal abatement cost be equal over all abaters.
– Under the tax regime all firms adjust their firm-specific abatement levels to equate their marginal abatement
cost with the tax rate.
– But as the tax rate is identical for all firms, so are their marginal costs.
• Knowledge of both the aggregate marginal pollution damage function and the
aggregate emissions abatement cost function are necessary for achieving a socially-
efficient emissions target at least real resource cost to the economy as a whole. But it is
not necessary to know each firm’s marginal abatement cost function.
• There is a problem with emissions taxation – if the firms’ MNPB(P) functions are not
known, it is not possible to calculate the tax rate that will bring about the desired overall
reduction in pollution. Whatever reduction is achieved will be brought about at least
cost, but it could be too big or too small.
• Tradeable permits avoid this problem. Since the quantity of permits issued is equal to
the desired level of total emissions, assuming compliance, the achieved reduction is that
intended. Tradeable permits are dependable, as well as least cost. They have the least
cost property because with a single market price per permit, all firms move to where
their MNPB = permit price, and the situation is as in the previous slide.
• If the permits are initially issued free, there is no revenue arising, as there is with
taxation.
Marketable emissions permits
Marketable permit systems are based on the
principle than any increase in emissions must be
offset by an equivalent decrease elsewhere.
There is a limit set on the total quantity of emissions
allowed, but the regulator does not attempt to
determine how that total allowed quantity is
allocated among individual sources.
A tradeable permit system can attain the
socially efficient level of pollution emissions (M)
Emissions, M
MNPBM
Total supply of
permits
0 M*
Equilibrium permit priceP*
An emissions tax can attain the socially efficient
level of pollution abatement (Z)
Pollution
abatement, Z
SMBZ
MCZ
0 Z2
tax ratet*
An abatement subsidy can attain the socially
efficient level of pollution abatement (Z)
Pollution
abatement, Z
SMBZ
MCZ
0 Z2
S* Subsidy rate
The initial allocation of permits and the determination
of the equilibrium market price of permits
Two general methods of initial allocation:
• Case 1: the EPA sells all permits by auction
• Case 2: the EPA allocates all permits at no charge (which in turn requires that
a distribution rule be chosen)
Figure 6.9 The determination of the market price of emissions permits
Auctioned permits case
Marginal abatement cost
(aggregate)
*
M̂M* Emissions,
M
0
Fixed supply of
permits
A firm will bid to
purchase an
additional emissions
permit whenever the
marginal cost of
abating emissions
exceeds the permit
price. The market
equilibrium permit
price is determined
by the value of the
aggregate marginal
abatement cost at the
level of abatement
implied by the total
number of issued
permits.
Demand for permits
*
EP* Emission permits
(EP)
0
Figure 6.10 The determination of the market price of emissions permits: free initial
allocation case
Supply of permits
Figure 6.11: Efficient abatement with two firms and marketable permits
0
20
40
60
80
100
120
140
160
180
200
0 5 10 15 20 25 30 35 40 45 50
Emissions abatement, Z
Marg
ina
l ab
ate
men
t co
st
MC(B)
MC(A)
MC(INDUSTRY)
Required industry wide abatement
Equilibrium permit price =
Marginal abatement cost for
each firm = 75
Under tradable permit schemes, in equilibrium marginal abatement costs will be equal over all firms. Hence
marketable permits, like taxes and subsidies, achieve any given target at least cost. Moreover, if the total
quantity of permits issued is M* and that quantity is identical to the level of emissions which would emerge
from an emissions tax (or an abatement subsidy) at the rate * then a marketable permit scheme will generate
an equilibrium permit price *.
top related