Environmental Regulations in Developed and Developing Countries

Real-world applications dealing with industrial pollution

Types of regulations considered

Price instruments (taxes, fees, fines, tariffs)Quantity instruments: quotas, limitsTradable permitsTechnology restrictionsLiability rulesInformation disclosure

Sulfur emissions: acid rain

Sulfur a major precursor to acid rainAcid rain has different effects depending on physical factors where it is deposited

Scandinavia: old rocks, very sensitiveEngland: not sensitive

European policies for sulfur

Encourage switching energy sources from oil & coal to gas (UK), hydro/nuclear (Sweden, France)Performance standards (sulfur content of fuels)Design standards (mandatory technology)

European policies for sulfur

Taxes (energy or fuel)Sweden, Norway, Denmark ~$2000/tonOther European ~$50/ton (Italy, France, Spain)Though to be modestly effective. Responsible for 30% reduction in Sweden.

Tradable sulfur permits (US)

1990 CAAA, Title IV established market for SO2 among electric utilities.First time in U.S.Issued 9 million 1-ton permitsPermits free, based on grandfatheringProve compliance at end of year.Can sell or bank permitsPrice: $100 - $500/ton (1993-2001)

Tradable sulfur permits cont’d

Marketable permits have potential to reduce control cost when heterogeneous abatement cost.Heterogeneous SO2 polluters in USCost savings due to trading: $800 million

Nitrogen oxides (NOx)

The other major precursor to acid rainTechnically more difficult to monitor, predict, and abate.Many approaches used to abate

Refunded emissions payments: Sweden

NOx reduced by 20% (but SO2 reduced by 80%).Tax on electricity prod. of $4000/tonRevenues returned to polluting companies depending on production

Clean companies, net gain. Dirty, net loss.

Very successful, politically viable

Ground-level ozone: NOx in US

CAAA specifies:Reduce NOx by 400,000 tons/yr between ’96-’99 and by 1.2 million tons/yr after.

E.g. RECLAIM in LA basinAims for 80% reduction in NOx and SOx from ’94-’03. Each licensed source has to reduce emissions – if over-comply, can trade

Green tax reform in Europe

Sweden and Germany in particularUse environmental taxes to finance decreases in other taxesHighly criticized on many grounds.Not necessarily large enough to do much good.E.g. oil ($100/m3), coal ($100/ton), also natural gas, LPG, electricity

Liability rules: Superfund

Deals with dumping of toxic wasteE.g. Love Canal (near Niagra Falls)

21,000 tons toxic chemicals buried$100 millions spent on cleanup, $14 billion in private lawsuits

Superfund 1980, tax petroleum, chemical industries. Proceeds to clean up hazardous waste sites.

Superfund continued

By 1995 $11 billion collectedBy 2000 757 Superfund sites completed.EPA had reached settlements with polluters totaling $16 billion.Use strict & retroactive and joint liabilityWith limited knowledge, liability a good approach (maybe better than mkt based)May require liability bond as a deposit

Information disclosure

Toxic Release Inventory (TRI) started in 1986 to provide public information about release of toxic substances640 chemicalsAlso voluntary agreements (e.g. 33/50)Local environmental groups use TRI to pressure & report on industryMore info better economic performance. Good starting point for new regulations.

Global policy: Ozone

Montreal Protocol (1985) on substances that deplete the ozone layer (into force 1989). Most countries developed individual plans to ratchet down productionPermits traded but not banked.Some countries restricted imports on ozone destroying substance products.

Global climate change

1997 Kyoto Protocol – mainly industrialized countries agreed to % reductions from 1990 levels (avg 5%)US continues to reject Kyoto

Distribution of current & future burden“hot air”, commitment from developing

Permits, int’l taxes, non-carbon substitutes, carbon sequestration

Incentives for innovation

Policy Gains to innovating firm

Command & Control none

Best available technology

-

Performance Standards

++

Emissions tax +++

Auctioned permits +++++

Grandfathered permits ++

Tradable performance standards

++

Environmental regulations in the developing world

Often environment is low on policy priority list – urge to industrializePolicy focus: employment & incomeDiverse instruments used, hard to generalize.Typically market based instruments not as widely used or effective.

Environmental Kuznet’s Curve

Income

EmissionsEarly phases of economicgrowth tend to pollution

As income rises, cleanenvironment is valued more, emissions decline

But v. difficult to estimatedue to lack of time series

Environmental charges & funds

Central & East Europe (planned economies): high pollution last few decadesAttract limited international capitalInstituted some environmental taxes

But no bite until decentralized

Poland: careful CBA to attract debt-for-nature, unusually successful

Planned economy emissions fees

Sulfur, NOx, carbon, some particulates, leadTransportation tollsWater extraction charges, water pollution fines, waste management fees, fertilizer and pesticide fees

Regulations in China

Most populous, one of poorest, one of most polluted countriesAir quality in Beijing: 100 tons SO2, one statistical life (cost = $300)1979 law allows charging for pollution, by 1994 $2 billion collected.

Fees charged when emissions above max.Fees too low to achieve standards.

Fees in Rio Negro, Colombia

Colombian economy growing quicklyWater/air pollution major problems1993 law that environmental damages must be taken into account

Stipulates use of economic instrumentsFees implemented: 28% decline in pollution in first 6 months

Voluntary emissions control

Informal sector in Mexico: brick makingDifficult to monitor, regulate (similar to non-point source pollution)20,000 brick kilns burn nasty stuff

Too difficult to enforce ban on dirty fuelsSubsidize propane, voluntary switchZoning for certain activitiesInvolve local grassroots

Info & institutions: Indonesia

Rapid economic growth – drastic exploitation of resources“Program for Pollution Control Evaluation and Rating” (PROPER) – similar to TRI

Reporting, evaluating, assisting firmsGrades each industry, reports in pressVery successful

Other countries have adopted similar (Mexico, Phillippines, Papua New Guinea)…