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environmental economics. Chapter 13. 2 issues. what is appropriate level of waste? how to achieve that level (who has to reduce how much?). take usual approach. identify efficient levels of pollution discuss market levels of pollution demonstrate how policy can reconcile.

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2 issues
2 issues
  • what is appropriate level of waste?
  • how to achieve that level (who has to reduce how much?)
take usual approach
take usual approach
  • identify efficient levels of pollution
  • discuss market levels of pollution
  • demonstrate how policy can reconcile
pollutant taxonomy
pollutant taxonomy
  • stock pollutants: accumulate over time / little or no absorptive capacity
    • nondegradable materials
    • heavy metals
  • fund pollutants: some capacity to be absorbed
    • organic pollutants
    • CO2
  • efficient allocation depends on nature of pollutant
fund pollutants efficient allocation
fund pollutants: efficient allocation
  • if no accumulation, future damage independent of current emissions…can use static framework
  • max net benefit from pollution
    • minimize costs: 2 types
      • damage costs (increasing in pollution)
      • control / avoidance / abatement costs

(decreasing in pollution)

efficiency mcc mdc
efficiency: MCC = MDC
  • points left of Q* (less pollution) inefficient
    • cost > benefit in damages avoided
  • points right of Q* (more pollution) inefficient
    • damages > cost of cleanup
  • increasing or decreasing control would increase TC
optimal pollution not zero
optimal pollution not zero
  • cases where could be very close to zero
  • MDC of first unit > first unit MCC (plutonium?)

$

MDC

MCC

pollution

market allocation of pollution
market allocation of pollution
  • damage costs externalities; control costs not
    • cheap to a firm not cheap to society
  • problem particularly severe with stock pollutants
    • extra burden on future generations due to accumulation
policy responses
policy responses
  • how to achieve MCC = MDC?
  • legal limits (Q*)
  • internalize damage through tax / charge system
easy in theory difficult in practice
easy in theory / difficult in practice
  • need to know Q where 2 MC’s cross for every emitter (high information costs)
  • alternative: select Q based on other criteria
    • safe for human / ecological health
  • then, how to allocate responsibility for meeting this level?
  • use cost-effectiveness criterion
    • not necessarily optimal, but minimizes cost given some level Q
cost effective allocation example
cost-effective allocation: example
  • assume 2 sources currently emitting 30 units
  • reduce to 15 units
  • how to allocate reduction between 2 sources?
cost effective reductions1
cost-effective reductions
  • source 1 cleans up 10 units (cost A)
  • source 2 cleans up 5 units (cost B)
  • any other allocation…higher TC (area bigger)
demonstrates important proposition
demonstrates important proposition
  • cost of achieving given reduction in emissions will be minimized if and only if MC of control (abatement) equal across emitters
  • what policy instrument to achieve equality?
    • emissions standards
    • emissions charges
    • emissions trading
emissions standards
emissions standards
  • command and control
  • equal reduction?
  • not cost-effective
  • first source lower cost
  • total costs increase if both forced to clean up same
emission charges
emission charges
  • fee on each unit emitted
  • profit-maximizing firm controls rather than emits when cheaper to do so
emission charges1
emission charges
  • if no pollution control, pay OTBC
  • best can do?
  • no: cheaper to pay to reduce emissions until MC reduction = emissions charge
  • minimizes cost by cleaning up 10 units and emitting 5 units
  • pay OAD in control, ABCD in emission charges, total costs OABC < OTBC
emission charges2
emission charges
  • if levied same charge on both, each source would control until MC = charge, and independently choose levels of control consistent with equal MC costs
  • as long as authority imposes same charges, automatically minimize TC of control
    • despite lack of information on firm’s costs
how to set appropriate emissions charge
how to SET appropriate emissions charge?
  • iterative trial and error
  • choose rate, observe reduction
    • if too large, reduce
    • if too small, increase
  • charges not only create cost-effective allocation, also stimulates technological progress
charges vs standards
charges vs. standards
  • standard based on specific technology
  • as new technology discovered, standards tightened
  • firms have incentive to HIDE technological advances
  • with charges system, firm saves $ (A+B) if can reduce pollution at MC < T
  • voluntarily reduces emissions from Q0 to Q1
transferable emission permits
transferable emission permits
  • can identify cost-min allocation without trial and error
  • all sources required to have permits to emit
  • freely transferable
  • authority issues exactly # permits needed to produce desired emission level
emissions permit system1
emissions permit system
  • suppose source 1 has 7 permits (1 permit = 1 emission unit)
    • controls 8 units
  • suppose source 2 has 8 permits
    • controls 7 units
  • both firms have incentive to trade (MC2>MC1)
emissions permit system2
emissions permit system
  • source 2 can lower cost by buying permit from source 1 at price < C
  • source 1 better off selling permit at price > A
  • transfer until
    • source 1 has 5 permits (controlling 10)
    • source 2 has 10 permits (controlling 5)
  • permit price = B
    • neither source had incentive to trade further
other issues with instruments
other issues with instruments
  • revenue effect
    • taxes / charge system raises revenue; permits do not
    • may be “double dividend”…use revenue to offset other taxes
another issue uncertainty
another issue: uncertainty
  • cost of being wrong

MCC

MDC

$

$

use charges

MDC

MCC

use permits

emissions controlled

emissions controlled

Prevent large fluctuations in damage costs

Prevent large fluctuations in control costs