The Economic Approach to Environmental and Natural Resources, 3e

Exhaustible Resources, Pollution and the Environment Part II

Introduction • The focus of this chapter is on the impact of energy use on the environment, with a particular focus on air pollution and acid rain. • Although all types of energy have some type of environmental impact, fossil fuels are responsible for the majority of the negative impacts of energy use. This is due to: • the large environmental impact per BTU of fossil fuel use, and • the magnitude of fossil fuel production and use.

Introduction • Perhaps the greatest negative interaction between energy and the environment occurs with air pollution, where the combustion of fossil fuels is the major source of the air pollutants that were initially regulated by the 1972 Clean Air Act, with amendments in 1977 and 1990. • These pollutants include particulates, sulfur oxides (SOx), nitrogen oxides (NOx), carbon monoxide (CO), volatile organic compounds (VOCs), and lead (Pb).

Introduction • As Figure 9.1 indicates, the level of most of these pollutants have declined since the passage of the Clean Air Act, except for nitrogen oxides. • Nitrogen oxides have increased because of the increasing emissions from on-road and off-road vehicles and off-road engines. • In addition to fuel consumption, the use of energy is responsible for virtually all the pollutants in the transportation sector and a good portion of the emissions in industrial processes. • Despite reductions in overall emission levels in the US, approximately 98 million people live in “nonattainment areas” (locations which persistently fail to meet national ambient air quality standards).

Regulations on Stationary Sources of Pollution • Stationary sources of criteria air pollutants (smokestacks from factories and buildings) are regulated under the Clean Air Act of 1972 and its amendments (1977 and 1990). • Using federal government established national ambient standards on concentration of each pollutant, states implemented command and control policies to reduce emissions. • These command and control policies did not allow firms to seek cost-minimizing alternatives in production.

Regulations on Stationary Sources of Pollution • The “Pollution Bubble” concept was a modification of the command and control regulations which treated each firm as if a glass bubble encased the entire firm's operations. • Firms could make adjustments within the bubble as long as the pollution that left the bubble conformed to emissions limitations. • While allowing some flexibility to respond to pollution standards, even the modified the policy was not effective in reducing pollution.

Regulations on Stationary Sources of Pollution • An interesting case in point is Southern California which, primarily because of automobile traffic, could not meet the federal standards. • Southern California was declared a non-attainment zone, and no new sources of pollution were permitted. • This meant no growth in industry and the possibility of a stagnant economy.

Regulations on Stationary Sources of Pollution • Modification to the Clean Air Act allowed new emission sources if they induced existing polluters to reduce pollution by 150 percent of the amount generated by the new source. • This "offset" system allowed development but limited trade to new firms and was not as efficient a policy as marketable permits. • As part of its effort to meet ambient quality standards, California currently has the most stringent standards on emissions from automobiles in the nation.

Stationary Source of Pollution and Acid Rain • Acid deposition refers to a process by which certain types of pollutants chemically transform into acidic substances in the atmosphere and then fall to the earth. • Forms of precipitation include acid rain, acid snow, and acid fog. • It also possible to have dry deposition. • While acid rain has received a lot of press, there is considerable uncertainty about the actual damages generated by the emissions of acid deposition precursors. • Precursor pollutants are those pollutants that are chemically transformed to generate the substances that actually cause the environmental damage.

Stationary Source of Pollution and Acid Rain • The Acid Precipitation Act of 1980 was the culmination of concerns about acid deposition which began in the 1970s. • This act established the National Acid Precipitation Assessment Program (NAPAP) to provide regional information about effects of acidity on resources, the extent to which acid deposition and related pollutions are responsible for causing these impacts, and strategies to control acid deposition and related pollutants.

Stationary Source of Pollution and Acid Rain • Acid rain belongs to a category of pollutants referred to as regional pollutants, which have effects over more than just the vicinity of their emission. • Unlike global pollutants, location of emissions is important with regional pollutants. • Acid deposition problems often manifest as transboundary (transfrontier) pollutants. • Two examples include: • Sulfur dioxide emissions in the United States which affect environmental quality in Canada and vice versa. • Pollution generated in Great Britain and German which causes acid deposition in Scandinavia.

What Causes Acid Deposition? • The most important precursor pollutants in the acid deposition problem are sulfur dioxide and nitrous oxides. • Sulfur dioxide is associated with the burning of coal and oil as boiler fuel. • Nitrous oxides are primarily associated with automobile emissions. • Acid rain and other forms of acid deposition are caused when sulfur dioxide and nitrous oxides form sulfate and nitrate in the atmosphere, which then combines with hydrogen ions to form acids. • Sulfate and nitrate molecules are formed when sulfur dioxide and nitrous oxides combine with oxidants in the atmosphere.

What Causes Acid Deposition? • Tropospheric ozone (03) is an important oxidant which is formed when two pollutants, nitrous oxide and volatile organic compounds (VOCs) chemically interact in the presence of sunlight. • The presence of VOCs in the atmosphere, while not directly responsible for acid deposition, leads to greater proportions of sulfur dioxide being converted to sulfate and nitrous oxides being converted to nitrate. • The following tables provide various anthropogenic sources of sulfur dioxide, nitrogen oxides, and VOCs emissions and trends in emission levels (a complete list is in the Appendix).

What Causes Acid Deposition? • The nature of the chemical relationships requires a coordinated effort at reduction of the differing pollutants. • A reduction in nitrous oxides not only directly reduces acid rain, but indirectly reduces the conversion of sulfur dioxide by reducing ozone. • The interactions among these pollutants make the identification of the optimal level of pollution an extremely difficult problem. • The marginal damage function for sulfur dioxide depends not only on itself but also on the level of nitrous oxide and VOCs.

What Causes Acid Deposition? • Even if the marginal abatement cost function was known, one could not determine the optimal level of sulfur dioxide emissions without also knowing the costs of reducing nitrous oxide and VOCs, which in turn could shift the marginal damage function. • The process of identifying the optimal level of sulfur dioxide (or nitrous oxide or VOCs) can be even more complex if the marginal abatement cost of one pollutant is a function of the abatement level of other pollutants. • Changes in a production process that increase energy efficiency could reduce the level of all pollutants, while some abatement devices, scrubbers for example, result in a decrease in one type of pollutant and an increase in another. • As Figure 9.3 indicates the optimal level of a pollutant becomes a moving target.

What Causes Acid Deposition? • Since the optimal level of each of the three pollutants cannot be determined independently of each other, the level of emissions of each must be chosen to minimize the sum of the total abatement costs and total damages associated with all three pollutants. • Equation 9.1 represents the situation where total abatement costs (TAC) are a function of the level of emissions of all three pollutants (El,E2,E3). • Equation 9.2 represents total damages (TD) as a function of all three pollutants. • The minimization of the sum of total abatement costs and total damages requires that the marginal damages of each pollutant are equal to the marginal abatement costs of each pollutant. • Equations 9.3 – 9.5 must be solved simultaneously to determine the optimal output level of each pollutant.

The Impacts of Acid Deposition • Acid deposition and related pollutants have many significant impacts on natural systems and human systems. • These include acidification of surface water and detrimental effects on high elevation coniferous forests. • Sulfur dioxide, sulfate particles, and acid aerosols are all suspected of having detrimental effects on human health. • Ozone, caused by the emission of nitrous oxides, has harmful effects on both vegetation and humans. • The particles that generate acid deposition also serve to scatter light, creating a "pollution haze" and reducing visibility. • Acid deposition also leads to the premature weathering and degradation of materials used in buildings, monuments, fences, and other structures.

The Impacts of Acid Deposition • Table 9.1 illustrates the effects associated with acid precipitation, as presented in the 1990 Integrated Assessment Report of NAPAP. • Market effects indicated impacts that are felt by producers and consumers of goods that are bought and sold. • Nonmarket values can be either use or non-use values.

Acid Deposition Policy • Although research conducted to determine acid deposition relationships yielded important insights into cause and effect relationships, the knowledge was site specific and not easily generalized to larger regions. • The NAPAP research program, which spanned the decade of the 1980s, resolved many scientific questions concerning the dispersion of pollutants, the chemistry of its transformation into acid deposition, and many of the ecological effects of the acid deposition. • Very little research money was spent looking at the willingness to pay to prevent identified impacts based on the belief that the uncertainty involving the scientific relationships would result in meaningless estimates of economic relationships. • How do policymakers develop a set of efficient policies when the benefits of reducing acid deposition are unquantifiable?

Pre-1990 Acid Deposition Policy • The pre-1990 Acid Deposition Policy focused primarily on the establishment of cause and effect relationships. • The Reagan administration's policy required that more information be developed before implementing any reductions in emissions of SO2 and NOx. • SO2 and NOx are "criteria pollutants” that are regulated under the 1972 Clean Air Act and the 1977 Clean Air Act Amendments. • The fact that these regulations focus on local effects of emissions may have exacerbated the problem. • One way in which a local polluter can minimize the local effect of pollution emissions is to build a tall smoke-stack which injects pollutants into higher wind currents which carry these pollutants into other areas. • These tall smokestacks were, to a large extent, responsible for the sulfur component of the acid deposition problem.

Acid Deposition Policy and the 1990 Clean Air Act • The political problem associated with supporting legislation which reduces the standard of living of constituents was dealt with through the creation of the 1990 Clean Air Act Amendments (CAAA), which packaged several environmental problems within the same pieces of legislation. • These amendments address the problems of acid rain, local air quality associated with ozone and carbon monoxide, pollution from cars and trucks, air toxins, and stratospheric and global climate protection. • Acid deposition is dealt with in Title IV of the 1990 CAAA, which specifies a ten million ton reduction in annual sulfur dioxide emissions to be achieved by the year 2000. • An interesting aspect of Title IV of the 1990 CAAA is that it represents the first attempt by the federal government to implement a system of marketable pollution permits.

Acid Deposition Policy and the 1990 Clean Air Act • Economists applauded the incorporation of marketable permits as an important step in improving the efficiency of environmental regulations. • The primary criticism against the permits was that there is no attempt to make geographic distinctions associated with the location of emission of SO2. • The first trade to occur was between a Wisconsin utility and the Tennessee Valley Authority (TVA). • The sale of allowances from Wisconsin to Tennessee resulted in less pollution by the Wisconsin utility and more by TVA. • The cost of reducing pollution by the amount of the traded allowances must be less than the price of the allowances, or the Wisconsin utility would not have agreed to the sale. • Similarly, the savings in the abatement costs for TVA must be greater than the cost of the permits. • Both companies lowered their costs.

Acid Deposition Policy and the 1990 Clean Air Act • If the only impact of sulfur dioxide pollution is acid rain, the cost of which is independent of location, then there will be no change in environmental quality. • If local pollution effects exist, then the trade will reduce local environmental quality in Tennessee and increase the quality in Wisconsin. • A comparison will have to be made between the loss to citizens in Tennessee and the gain to citizens in Wisconsin. • A potential Pareto improvement is still possible if the citizens of Wisconsin gain by more than the loss by citizens in Tennessee.

Acid Deposition Policy and the 1990 Clean Air Act • Another potential problem with the acid rain provisions of the 1990 CAAA is that not all emitters of SO2 are incorporated into the system, and NOx is not part of any trading system. • It may be that obtaining greater reductions from small emitters and mobile sources (which were not included) is cheaper at the margin. • The 1990 CAAA amendments did take positive steps to reduce the acid rain problem. • With a goal of reducing sulfur dioxide emissions by roughly 50%, Phase I of the program, which began in 1995, developed a cap on emissions of most polluting power plants.

Acid Deposition Policy and the 1990 Clean Air Act • One of the fears expressed by opponents of the Sulfur Trading Program was that local air quality would decline in areas where most of the electric power generation was from older plants facing higher abatement costs. • Although the system has lead to some patterns of trading that increase emissions in certain areas, it does not appear that this has caused any areas to violate the federal standards. • The sulfur trading program has been relatively successful with long run cost savings associated with the program estimated at $0.78 billion, however the volume of trade has been less than anticipated. • Factors which have contributed to this include uncertainty about the future, obstacles to trading created by state-level regulatory agencies, and a desire, on the part of firms, to bank emission reductions for the future, rather than selling them today.

Acid Deposition Policy and the 1990 Clean Air Act • One interesting outcome of the program is that prices of allowances have been lower than anticipated suggesting that marginal abatement costs are lower than predicted. • The US Environmental Protection Agency originally predicted an allowance price of $1500 per ton, but revised this downward to about $500 in 1990. • Actual prices started out around $250-$300 per ton and fell to $70 per ton by 1996. • The price has risen in more recent auctions.

Acid Deposition Policy and the 1990 Clean Air Act • Table 9.2 contains a summary of the acid rain provisions (Title IV) of the 1990 Clean Air Act, and Figures 9.4 and 9.5 show the anticipated levels of emissions as a result of this legislation. • An important point to remember is that the target of ten million ton reduction was not an optimal reduction but rather a value supported by the scientific research and acceptable to most members of Congress.

Acid Deposition Policy and the 1990 Clean Air Act • The 1990 CAAA required NAPAP to conduct an assessment of the costs and benefits associated with this reduction by 1996 with periodic assessments every 4 years and to identify the levels of reduction that will prevent adverse ecological impacts (not defined in legislation). • Another important point is that Title IV relies primarily on command and control provisions. The only exceptions are the trading allowances. • The Clean Air Act also reflects a negotiated agreement between the United States and Canada. • The two countries entered into a "Bilateral Agreement on Air Quality" in 1991 to deal with acid deposition precursor pollutants and other types of air pollution.

Regulations on Mobile Sources of Pollution • The primary regulation on mobile sources of pollution is specifying abatement control devices for vehicles. • All automobiles are required to employ a catalytic converter. • Platinum in the converter serves as a catalyst that lowers the ignition temperature of many of the unburned hydrocarbons and other pollutants in gasoline.

Regulations on Mobile Sources of Pollution • One problem with this command and control regulation is that it controls all areas of the country in the same fashion, regardless of impact of an additional units of emission. • Additionally, it does not provide incentives to reduce pollution by driving less, maintaining their cars, or choosing an alternative vehicle or mode of transportation. • Air pollution from automobiles is also indirectly controlled by Corporate Automobile Fuel Efficiency (CAFE) standards, which specify the average miles per gallon that must be achieved by each automobile manufactured, where a higher MPG means less gasoline burned per mile which means less emission. • This standard does not reduce the number of miles driven and may actually induce greater mileage.

Regulations on Mobile Sources of Pollution • Mills and White suggest an alternative policy which would tax cars based on the total amount of pollution that they generate each year. • An annual diagnostic test would determine the emissions per mile and this multiplied by the odometer reading would give annual emissions. • A combination of federal and state taxes could be used to account for regional difference in ambient air quality. • This would create incentives to drive less, live closer to work, and develop lower polluting automobiles.

Energy Policy and the Environment • US Presidential Administrations have integrated environmental policy and energy policies usually with two major goals: • Increase domestic supplies of energy and reduce dependence on foreign oil. • Promote a cleaner environment by requiring energy users to utilize cleaner technologies. • These policies have had a mixed record of success.

Energy Policy and the Environment • One dominant factor in the failure of US energy/environmental policy is that it fails to allow the cost of energy, particularly imported petroleum, to reflect its true social cost. • This cost has two components: • The social cost of dependence on insecure imports of petroleum. • The environmental cost of energy use.

Energy Policy and the Environment • Energy policy has traditionally been designed to keep energy costs low. • A higher cost associated with energy use would result in the development of alternatives to fossil fuels, a reduction in the amount of pollution per unit of energy used, a reduction in energy use, the development of more energy efficient technologies and a reduction in oil imports.

Energy Policy and the Environment • There is a fundamental disparity between the private cost of energy use and the social costs associated with its use. • There are a variety of ways to eliminate this disparity. • The least costly would be a comprehensive series of market pollution permits or a system of per unit pollution taxes. • A combination of both permits for large stationary polluters and taxes for mobile sources may be best. • Externalities in the production of energy could be addressed with liability and bonding systems.

Energy Use and Environmental Taxes • Fuel taxes may be a second best solution to pollution taxes or permits. • A tax added to the price of fuel based on the average amount of pollution of the fuel would provide an incentive to burn less fuel and encourage energy efficiency. • However, taxes do not provide incentives to reduce emissions per unit of fuel burned. • In addition, many people object to being taxed on both philosophical and practical grounds. • Philosophical grounds center on the belief that government is too big and intrusive. • Practical grounds center around the idea that government spending tends to be wasteful.

Energy Use and Environmental Taxes • The importance of increasing the price of fuel can be seen both in pollution problems arising from energy use and the lack of progress in developing alternative energy sources. • Alternative sources of energy include solar power, geothermal power, wind power, and liquid fuel from renewable sources such as ethanol and methanol from a variety of plant sources. • While alternative sources of energy are generally less polluting than fossil fuels, alternative energy technologies are more expensive for energy users than coal or oil, so they have not become established as important sources of energy. • Alternative fuels and energy technologies would be significantly advanced if the price of fossil fuels rose to incorporate the full social cost of these fuels as illustrated in Figure 9.6.

The Economic Approach to Environmental and Natural Resources, 3e