agec5001 pollution control

CBA vs. CEA

CBA: NB = B - C (ie. finding the pos/neg NB of a policy)

CEA: “how much does it cost to achieve a certain goal?”

the economic perspective towards pollution

pollution is an externality problem (markets fail to account for environmental costs; lack efficient solutions to balance C&B)

absorptive capacity

the environment’s natural ability to break down, dilute, or absorb waste materials without suffering significant harm

• waste load is within the capacity → assimilation

• waste load exceeds the capacity → accumulation

the zone of influence

a geographical classification system that categorizes pollutants based on how far their impact reaches from the source (local, regional, or global)

implications:

• categories are not mutually exclusive (ie. substances can be both local & regional)

• different zones require different policy approaches

stock pollutants

substances that accumulate over time due to having little to no absorptive capacity and can cause intertemporal damage depending on our present actions (ex: heavy metals, non-biodegradable bottles)

fund pollutants

substances that the environment can absorb up to a certain threshold before they cause damage (ex: organic pollutants, biodegradable waste)

the efficient allocation pattern for stock pollutants

1. decrease quantity over time

2. quantity eventually reaches a steady state, and all emissions are controlled through recycling

3. prices rise to reflect increasing damage costs (incentivizes gradual reduction)

the efficient allocation pattern for fund pollutants

minimize damage & control costs — optimal/efficient level: where marginal damage = marginal control costs

*the efficient level of pollution is almost never zero

why is the efficient level of pollution not at zero?

• complete elimination of pollution is very expensive 

• benefits from the production of some goods may justify some pollution

• the efficient level of pollution balances C&B

2 parts of market failure

1. air & water are treated as common-pool resources (ie. no ownership = no incentive to protect them)

2. pollution damages are externalities, meaning that companies generally don’t have to pay for the costs affecting the public

command & control

a traditional regulatory approach where the gov commands polluters to meet specific targets and controls how they do it (ex: NAAQS, SIPs)

key features:

• emission standards for each source

• tech requirements

• uniform percentage reductions

• legal limits with penalties

cost-effectiveness problems with C&C

• C&C typically costs 2-20x higher than necessary (cost ratios range from 1.07-22.0)

• location & tech matter significantly

why C&C fails on cost-effectiveness

the problem:

• sources have different control costs, and uniform standards ignore these differences

• firms have no incentive for low-cost sources

• no mechanisms in place for high-cost sources to do less

the efficient condition for C&C

marginal control costs should be equal across all pollution sources (ie. polluters with the lowest control costs should do most of the cleaning up)

however, C&C rarely achieves this condition due to enforcing uniform standards

market-based instruments (MBIs)

corrects market failures more traditionally than C&C by using market forces (prices & competition) to give firms incentive to reduce pollution

price-based instruments

a MBI; the gov sets a price on pollution/environmentally harmful products, firms then decide how much to clean up based on that price

• emission charges/taxes, product charges, deposit/refund systems

quantity-based instruments

a MBI; the gov sets a limit on total pollution, then creates permits for firms to pollute within the quantity cap

• cap&trade programs, emissions trading, marketable permits

emission charges

a fee that a polluter must pay to the gov for every unit of pollution they emit

how emission charges change a firm’s decision making

firms must reduce their pollution until the cost of controlling one more unit (marginal control costs) is equal to the emissions charge

• if MCC < EC, it’s cheaper for the firm to control the pollution than to pay the tax

• if MCC > EC, it’s cheaper for the firm to pay the tax than to control the pollution

cap & trade systems

basic mechanisms: emissions cap, allowance allocation (permits distributed thru free allocation, auction, or hybrid approach), & trading permits

emissions charges vs. cap&trade systems

EC:

• price of pollution is fixed, quantity of pollution is a variable

• revenue generation goes to the gov

• trial & error process for tax rate

• less price volatility

C&T:

• quantity of pollution is fixed, price of pollution is variable

• no automatic revenue (only generated thru auctioned permits)

• the market determines the price

• price volatility for permits

when to choose cap&trade

• steep marginal damage curve (ie. even just a little more pollution will cause large amounts of damage)

• flat marginal control cost curve (ie. costs are relatively predictable)

• need quantity certainty

when to choose emission chargers

• flat marginal damage curve

• steep marginal control cost curve

• need price certainty