class 7 environmental policy tools
TRANSCRIPT
Class 7
Environmental Policy Tools
http://www.agecon.purdue.edu/staff/shively/courses/AGEC406/index.htm
Possible Interventions
1. Moral suasion
2. Government provision of goods
3. Damage prevention
4. Command and control
5. Economic Incentives
Economic Incentives
1. Tax (per-unit penalty)
2. Subsidy (per-unit reward)
3. Transferable Permits (market-based)
Focus on case of negative externality and compare:
1. Command and control (direct regulation)
2. Tax
3. Subsidy
Command and Control
Set limit on emission or specify technology
SMC = PMC + MD
Q Q M
PMC
PMB=SMB
MAX
Subsidy
Often used in conjunction with technology
MSC (Tech 1)
MPC (Tech 1)
MPC (Tech 2)
MSC (Tech 2)
Subsidy
Command and Control
1. When monitoring costs are high
2. When optimal emission is near zero
3. During random or emergency events
Consists of government-specified rules and regulations, often with fines and charges for violations. Most effective:
Drawback of C+C:
If marginal abatement costs are different for different pollutors, then C+C will lead to an inefficient allocation of clean up burden among different producers.
Marginal abatement cost function
Marginal abatement = pollution reduction of one unit.
The marginal abatement cost (MAC) function measures the dollar amount of the cost of reducing pollution by one unit.
Marginal abatement cost function
EmissionsE1
Cost MAC
Total Abatement CostC1
EU
Marginal Abatement Cost
Shape of curve depends on technology of clean-up
Marginal damage function
Dollar measure of incremental damage from pollution
EmissionsE
DamagesMD
Total DamageD
Socially inefficient (sub-optimal) levels of pollution
Excess social cost from too much abatement
Excess social cost from too little abatement
EmissionsE1
MAC
EU
Damages,Costs MD
Advantages of Economic Incentives
1. In most cases economic incentives will minimize the total costs of
abatement.
2. By penalizing polluting behavioror rewarding clean behavior, economic incentives tend to encourage research into better
abatement measures.
Pollution tax
Goal: set tax = marginal damage cost
Why: encourage polluter to “internalize” the externality
Key: Tax the externality, not the product.
Actual Tax Payment
Tax Avoidance
Potential Tax Payment
Polluter behavior with tax
EmissionsE1=6
CostsMAC = 10 - E
Tax=4
EU=10
T*Q=24
Key points regarding tax
1. Tax achieves socially optimal level of pollution
2. MAC may exceed MD for some levels of pollution. Therefore, the optimal level of pollution is likely to be greater than 0.
3. Individual polluters adjusts emissions to pointwhere MAC = tax, therefore MACs are
equalfor all polluters, which minimizes total costof obtaining target level of pollution.
Tradable Pollution Permits
1975 the U.S. EPA started an Emissions Trading Program to reduce air pollution.
Support for this market-based approach has grown both among businesses and environmentalists.
What is a tradable permit?
Flexible approach to reaching target level of pollution
Any source that reduces emissions more than required receives an “emission reduction credit” (ERC).
ERCs can be used to satisfy emission targets at other discharge points for which the MAC is higher.
ERCs can transferred or sold, thus allowing sources to find the cheapest means to controlling emissions.
Policy contextERC is “currency”
Policies governing use include:
Offset policy: firm uses ERC to continue polluting at another source
Bubble policy: total emissions within “bubble”are regulated, trade within is OK.
Emissions banking: firm can “stockpile” ERCs
ApplicationsAir pollution (1975)
Lead in gasoline (1982-1987)
CFCs and other ozone-depleting chemicals (1988-)
SO2 Acid rain (1993-)
Mobile sources (1993-)
Greenhouse gases (proposed)
Polluter behavior with regulation: Specify 4 units of emission each
E1=4
CostsMAC = 10 - E1
C1=6
E2=4
CostsMAC = 8 - 2 E2
C2=0EU=10
18
Polluter behavior with permit
1. Total Target Emission Level = 8, so E1 + E2 = 8
2. Set MAC1=MAC2 and solve.
10 - E1 = 8 - 2E2
10 - E1 = 8 - 2(8-E1)
10-8+16 = 3 E1
18 = 3 E1
6 = E1
Polluter behavior with permit: firms determine allocation of emissions
E1=6
CostsMAC = 10 - E1
C1=4
E2=2
CostsMAC = 8 - 2 E2
C2=4
EU=10
8
EU=4
4
Key messages:
1. Target Emission Level is reached.
2. Total cost of abatement is lower (12 vs. 18)
3. Optimal allocation is reached where firms equate MACs.
4. Permits allow low-cost firms to abate more than they otherwise would.