Pollution

G406, Regulation, ch. 11 Eric Rasmusen, erasmuse@indiana.edu

October 31, 2013

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``Pittsburgh from the Salt Works at Saw Mill,'' by William T. Russell (1843)

Sen’s Fable of Prude and Lewd

Lewd is looking forward to read a dirty novel he just bought. Prude objects, knowing that Lewd’s morals are already weak. Prude, in fact, would rather read the book himself than have Lewd read it, if someone has to read it. Prude will be grossed out, but he’d be willing to endure that to protect Lewd. Lewd has a malicious sense of humor. He would love it if Prude would read the book through, so his ideal is for both of them to read it. He would get such delight out of the thought of Prude reading it that he’d even be willing to give up reading it himself to get to that outcome. If each man acts freely, Lewd will read and Prude will not. But both of them would prefer it if Lewd didn’t read and Prude did. They both prefer that freedom be restricted. If they can contract with each other, that’s fine. If they can’t, though, does this justify coercive government regulation, banning the book for Lewd and forcing Prude to read it?

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The Impossibility of a Paretian Liberal, Amartya Sen, Journal of Political Economy, Vol. 78, No. 1 (Jan. - Feb., 1970), pp. 152-157 http://www.jstor.org/stable/1829633

``Pittsburgh from the Salt Works at Saw Mill,'' by William T. Russell (1843)

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Pollution Externality and Licenses

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Licensing vs. Regulation5

A Pollution Tax6

A Pollution Tax with Rising Supply

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Optimal Pollution8

US Emissions9

Marginal Damage of Emissions: Where To Put the

Factories

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Toxic Waste Dump Cleaning Cost and Benefit

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Two Firms and Cap and Trade12

Cap and Trade vs. Pollution Taxes

If it is very important to avoid letting total pollution crosssome particular threshold where its marginal cost risessharply, regulating quantity this way is better than puttinga price on it.

If it may be very beneficial to let output (and pollution)rise above a particular level, a pollution tax is better.If companies must buy their initial pollution permits, thequantity policy can, like the tax policy, raise revenue.

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EPA and EEX Auctions

The test U.S. auctions are at “Clean Air Markets,” http://www.epa.gov/airmarkets/trading/2011/index.html .Note the environmentalists.

Europe: http://petrolog.typepad.com/climate_change/2009/07/spot-price-of-eu-emission-allowances.html

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Selling Allowances Can Pay Better than Steelmaking

The Kyoto Protocol of 1997 required signing countries toreduce their carbon emissions. The European Union in2005 launched its own cap-and-trade system.

Corus, Europe’s second-largest steel producer, closed itsU.K. steelmaking plant at Redcar, cutting 1,700 jobs. It has 7.5 million carbon dioxide allowances. At e15/tonne,that’s worth 112.5 million euros,

Is the plant closing good, or bad?

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The Summers World Bank Memo

DATE: December 12, 1991TO: DistributionFR: Lawrence H. SummersSubject: GEP ’Dirty’ Industries: Just between you and me, shouldn’tthe World Bank be encouraging MORE migration of thedirty industries to the LDCs [Less Developed Countries]?

I can think of three reasons:

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Summers Memo pp 1, 5

http://ban.org/whistle/summers.html

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Summers Memo, first part18

1) The measurements of the costs of health impairingpollution depends on the foregone earnings from increased morbidity and mortality.

From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages.

I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

Summers Memo, second part 19

2) The costs of pollution are likely to be non-linear as theinitial increments of pollution probably have very low cost.I’ve always thought that under-populated countries in Africaare vastly UNDER-polluted, their air quality is probablyvastly inefficiently low compared to Los Angeles or MexicoCity.

Only the lamentable facts that so much pollution is generatedby non-tradable industries (transport, electrical generation)and that the unit transport costs of solid waste areso high prevent world welfare enhancing trade in air pollutionand waste.

Summers Memo, third part

3) The demand for a clean environment for aesthetic andhealth reasons is likely to have very high income elasticity.The concern over an agent that causes a one in a millionchange in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is 200 per thousand.

Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollutionconcerns could be welfare enhancing. While production ismobile the consumption of pretty air is a non-tradable

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THE COASE THEOREM:

But why do we need the government to establish licenses?If information is symmetric, negotiation is costless, andcontracts are costlessly enforceable,

then people will choose surplus-maximizing actions regardlessof whether there are externalities and regardless ofwho has the property rights.

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A Coase Theorem Example

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A paper mill is polluting a river. The farmer downstreamhad been selling trout fishing rights to rich tourists for$20,000.Now the trout have fled, and he gets zero.

The factory could install filtering machinery that wouldeliminate the pollution, at a cost of $4,000.

1.Suppose the farmer has the right to a clean river.

2. Suppose the factory has the right to dump its wastewater into the river.

What if Pollution Is Efficient in the Trout Example?

Let the trout fishing income be $2,500, not $20,000. Letmitigation cost stay at $4,000.

If the farmer has the right to clean water, what happens?

If the factory has the right to dispose of waste in the river,what happens?

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How the Coase Theorem Assumptions Break Down

Farmer benefit from trout: $20,000.Factory filtering machinery cost: $4,000.

If information is symmetric (that is, the players don’tdiffer too much in their information) . . .If negotiation is costless (that is, not too costly) . . .If contracts are costlessly enforceable, (that is, nottoo costly) . . .

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The Town of Cheshire Buyout

American Electric Power had a polluting coal plant in Cheshire,southeast Ohio, that locally produced bothersome air pollution.

The company bought most of the town for $20 million,supposedly for plant expansion.

Most of the 221 residents of Cheshire left. 90 homeownerswere paid three times the value of their houses. Theysigned away their suing rights.

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Applications of the Coase Theorem

1. Bees and crops that need pollination. http://pollinationconnection.com/beekeepers2. Inefficient contract law is not so harmful as inefficient tort law. If the standard contract rule is not value-maximizing, the two parties can write in a special clause. Binding arbitration, for example. 3. Coase’s example of two adjacent radio frequencies interferingwith each other. Clear property rights are enough.4. Buying out bad employees (IU presidents, coaches)

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Extortion27

The Case of Toby

http://www.rasmusen.org/g406/save-toby-com.pdf

http://www.bobparsons.me/archive_article.php?entry_id=38

http://www.theregister.co.uk/2005/04/13/rabbit_extortion/

“Toby Has Finally Been Saved!!!!!” http://www.savetoby.com/.

Global Warming

This externality has special features.

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The Science of Global Warming

Carbon dioxide is generated when people burn coal, oil,or wood, or make cement from calcium carbonate.Carbon dioxide is absorbed when plants grow.

If the earth has high carbon dioxide and water vapor levels, that keeps heat from leaving, a “greenhouse” effect. (Greenhouses keep heat from leaving an enclosed space.) We do not really know what causes Ice Ages or climatechanges, but we know they do happen.

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Reasons for Concern

Carbon dioxide emissions have quadrupled since 1950. The preindustrial amount of atmospheric CO2 was 280ppm(parts per million). Since 1960 it’s increasedsteadily from 315 to 390 ppm.

Average global temperature rose 1 degree Farenheit from1980 to 2000.

The sea level rose 80mm from 1970 to 2000.

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Human Sources of Carbon Dioxide

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Global Temperatures 1880-2012

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Look at the vertical axis: it is anomalies, not average temperature. Source: http://data.giss.nasa.gov/gistemp/graphs_v3/

World Temperatures 1996-2012

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http://data.giss.nasa.gov/gistemp/graphs_v3

U.S. Temperatures 1880-201034

http://data.giss.nasa.gov/gistemp/graphs_v3

Record Highs(black) and Lows(gray)http://www.drroyspencer.com/2012/08/fun-with-summer-statistics-part-i-usa/

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Bloomington Temperatures36

NASA’s map for world weather station time series is athttp://data.giss.nasa.gov/gistemp/station_data/.

A Badly Located Weather Station

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http://www.surfacestations.org/

Satellite-Measured Temperature

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Source: Roy Spencer, http://www.drroyspencer.com/latest-global-temperatures/.

Sea Level39

What’s Happened, Summary

The preindustrial amount of atmospheric CO2 was 280ppmv. Since 1960 it’s increased from 315 to 380 ppmv, to 0.038% of the atmosphere. Average global temperature rose about 1 degree Farenheitfrom 1980 to 2000. It also rose .5 degrees from 1910 to 1940, which can’t have been because of C02.The temperature has levelled off since 2000. The sea level rose 100mm from 1970 to 2000. It also rose 100mm from 1880 to 1970, which can’t have been because of CO2.

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Nobody Can Be Very Sure

The IPCC said in 2007“Limited and early analytical results from integrated analyses of the costs and benefits of mitigation indicate that they are broadly comparable in magnitude, but do not as yet permit an unambiguous determination of an emissions pathway or stabilisation level where benefits exceed costs. Climate sensitivity is a key uncertainty for mitigation scenarios for specific temperature levels.” [climate sensitivity is how much temperature responds to carbon]http://www.ipcc.ch/publications_and_data/ar4/syr/en/spms5.html

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ClimateGate, Gleichgate, Australians

2010: The U. of East Anglia in England has the most complete source for world temperature data. Someone leaked a large amount of emails and computer code they’d been keeping secret. They tried to suppress other scientist’s research, illegally kept info secret, done sloppy programming to adjust and average the data, deliberately misled people about their results, and had as secret allies supposedly objective websites and newspapers. In 2012, a leading activist faked his identity and got a list of donors from the skeptic Hudson Institute. Then he forged a memo, since the list of donors wasn’t very interesting. Also 2012: leading Australian climatologists claimed falsely to have been sent death threats and were moved to a secured building for safety. After resisting, the university revealed the emails to a government investigator and they turned out to not contain threats. http://www.theaustralian.com.au/higher-education/climate-scientists-claims-of-email-death-threats-go-up-in-smoke/story-e6frgcjx-1226345224816

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Costs of Global Warming

Decreased water except at high latitudes and moist tropical areas. Loss of coastland and coastal swamps. Less food production at low latitudes. Coral death from more acidic oceans.The biggest question is how temperature affects water patterns. Humidity will rise, but be unevenly spread. http://www.ipcc.ch/publications_and_data/ar4/syr/ en/mains3-3-1.html

Global Warming Costs and the Discount Ratehttp://rasmusen.org/g406/older/discounting.xls

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Costs

The IPCC, a U.N. organization, says that if carbon dioxide isn’t stabilized till the late 21st century, the temperature will increase about 7.2 degrees Farenheit .(http://www.ipcc.ch/publications_and_data/ar4/syr/en/spms3.html, “A1F1 scenario,” worst-case, Table SPM-1.)

Yale economist William Nordhaus says that we should spend a present value of $2.2 trillion on abatement, saving $5.2 trillion in warming costs. http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf That’s equivalent at a 5% discount rate to spending $110 billion per year on abatement.

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EPA vs. Massachusetts

In 1999, 19 private organizations filed suit demanding that the EPA regulate greenhouse gas emissions. Fifteen months later, the EPA requested public comment.It received more than 50,000 comments. The EPA concluded that carbon dioxide was not an “airpollutant,” so it had no authority to regulate it. The EPA’s denial was challenged in court, and the EPA lostin the Supreme Court. In 2009 it issued an endangermentfinding, and it has started regulating mileage of cars. Itcan only use command-and-control.

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Can the EPA Regulate Carbon Dioxide?

US Code 42. §7521. “Emission standards for new motorvehicles or new motor vehicle engines” says:(1) The Administrator shall by regulation prescribe (andfrom time to time revise) in accordance with the provisionsof this section, standards applicable to the emission of anyair pollutant from any class or classes of new motor vehiclesor new motor vehicle engines, which in his judgmentcause, or contribute to, air pollution which may reasonablybe anticipated to endanger public health or welfare.”

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The Nordhaus Plan

Reduce carbon dioxide 15 percent 2015-2050 relative to what it would be without regulation. Reduce by 25 percent after 2050-2100 and 45 percent after 2100. Since without regulation emissions would grow, they would still rise under this plan, but more slowly. He suggests a carbon tax of $28 per ton ($8/ton of CO2). Americans emit 5 tons per year on average now. That means 9 cents per gallon on gasoline, and a 10% tax on coal-generated electricity. At current levels, this would raise $50 billion per year of revenue. http://nordhaus.econ.yale.edu/dice_mss_072407_all. pdf

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The Garden Hose to the

Sky

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Solutions to Global Warming

1. Reduce carbon emissions: Taxes, tradable permits,command and control. Cost: $2.2 trillion (Nordhaus)2. Subsidize nuclear energy, wind, solar. 3. Carbon sequestration: Plant trees.4. Carbon sequestration: Lock carbon up under the ground.5. Geoengineering: Fertilize the ocean with iron. Cost= $300-500 billon. (5% discount rate)6. Geoengineering: Put light-blocking substances intothe atmosphere. Cost: $20-160 billion. (Barrett 2008)7. Amelioration: air conditioning, shifting to differentcrops, higher sea walls, and so forth.

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Helping Poor Countries

Costs and benefits of warming are unevenly distributed.Russia, Canada, and the United States could actually benefitfrom having less cold winters. Tropical countries– which are poorer– would lose more.

But for 1 trillion dollars per year, what else could be done tohelp poor countries? Should we reduce economic growth now to help people inBangladesh in 2100? Or should we help people in Bangladeshin 2011?

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Future Carbon Dioxide51

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Emissions by Region

Lots of Countries Produce Carbon Dioxide (2007)

China produced 22%, the US 20%, the European Union14%, India 6%, Russia 5%, and Japan 4%.

Other countries producing more than 1% were Canada,South Korea, Iran, Mexico, South Africa, Saudi Arabia, Indonesia, Australia, Brazil, and Ukraine.

http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions from http://mdgs.un.org/unsd/mdg/SeriesDetail.aspx?srid=749&crid=

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Summary

The main economic costs of global warming would be from water changes— drought and flood. Europe uses cap-and-trade. The EPA is starting to imposecommand-and-control. Carbon taxes are another solution. These can all include sequestration and offsets.

All solutions except adaptation face the problem that countries can free-ride. Geoengineering solutions are potentially the cheapest, but need research.

The big growth in carbon is in developing countries because of their big populations and income catch-up to developed countries.

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The Sackett Case (2012)

The Sacketts wanted to build a house in a subdivision 500 feet from a lake and got all the local permits. Without hearings or notice, the EPA announced their land was wetlands and they’d have to spend $27,000 to move some gravel to prevent erosion– more than the price of the plot of land--- or pay fines of up to $75,000/day. There was no standing water or stream on the land.

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The Sacketts Won

The EPA said the Sackett’s couldn’t take them to court unless they first spent several years applying for a permit and being officially denied, or unless they’d gotten a bill from the EPA for the daily fines. The Sacketts objected and said they had a right to challenge the EPA in court immediately. They lost in federal district court and in appellate court.

The Supreme Court ruled unanimously that the EPA was wrong in its claim that the Administrative Procedure Act didn’t allow challenges to its final decisions.

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More Numbers

Keeping CO2 down to 450 ppm (vs. 400 now) give us a4.9F increase.That needs a carbon tax of $40-$90 per ton of CO2 by2025 ($140–$330 per ton of carbon).The cost-side surplus loss from that policy would have apresent value cost of $8-$40 trillion dollars by up to 2050.At a discount rate of 5%, that comes to $400 billion to $2trillion per year. World GDP is $66 trillion.Stern Review: $85/ton.

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The Kyoto Protocol (1997)

OECD country emission reduction: 28% by 2012 belowtrend, an effect of 0.12 C at a cost (if the US were included)of $180 billion per year. If kept up forever, this would just keep average temperatures5 years behind what they would be otherwise.

The US would have had 4 times the cost and half thebenefit of Europe, so it stayed out.

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