Chapter 18
A marketable pollution permit is a permit:
A marketable pollution permit is a permit that allows a firm to sell the right to pollute. A firm can then exercise its right to pollute and use the permit or sell it on the open market. In this system, low polluting firms are rewarded with extra income from the permit sale and high polluters are punished by having to pay to pollute. If the total emissions allowed by all permits are lower than current levels, this system can function to lower overall emissions. Governments do not need permits to tax their own industry or citizens. And, under a global permit system one country could have a surplus of permits that were sold to other countries, but that is not the definition of a marketable pollution permit.
A negative externality causes:
A negative externality causes the social cost of production to be greater than the private cost. Social costs are the full cost to society due to the use of a resource. For example, a heavy manufacturing process costs in terms of labour and raw materials, but also in lower air and water quality costs that are borne by third parties. Social costs include all those costs which, in the case of a polluting industry, exceed the private costs. Additional Learning An externality occurs when someone other than the immediate parties to a transaction bear a portion of the cost or receive some benefit.
According to the graph, what is the impact of a pollution tax on this market?
According to the graph, the impact of a pollution tax on this market is a higher price and lower equilibrium quantity. The pollution tax increases the cost of producing electricity, and therefore, shifts the overall supply curve to the left (from Supply 2 to Supply 1). The equilibrium point moves from point i to point t, which increases the price from $64.90 to $67.60 per megawatt hour and decreases the equilibrium quantity from 4,294 to 4,247.
According to the graph, what is the optimum level of pollution abatement?
According to the graph, the optimum level of pollution abatement is 8 million tonnes. The optimal level of pollution occurs at the point where the marginal cost of pollution abatement is exactly equal to the marginal benefit of pollution abatement. That point occurs where the two lines intersect at 8 million tonnes or 1.1 million discharges.
Between 1995 and 2014, countries that have experienced significant increases in their annual GHG emissions include:
Between 1995 and 2014, countries that have experienced significant increases in their annual GHG emissions include Australia, Canada, and Finland. Countries that have experienced significant decreases in their annual GHG emissions between 1995 and 2015 include Japan, France, Italy, Germany, the United Kingdom, Sweden, and the Russian Federation. Some of these countries accomplished GHG emissions reductions while achieving continued GDP growth over the 25-year period.
Direct controls are __________ and __________ to monitor and to enforce.
Direct controls are difficult and expensive to monitor and to enforce. The regulatory agency has to verify how many pollutants and what kind of pollutants are being emitted. A mechanism for penalizing offenders also needs to be established and enforced. The probability of being caught and the severity of the penalty should be enough to induce potential polluters to obey the law. If the chances of being caught and the penalties are small, the direct controls may have little effect.
Direct pollution controls are usually __________ because they do not __________ the total cost of a given amount of pollution abatement.
Direct pollution controls are usually inefficient because they do not minimize the total cost of a given amount of pollution abatement. Direct controls can be problematic because when firms are required to abide by the same direct pollution controls, the marginal cost of pollution abatement is usually not equated across firms. Different firms may have different technologies and thus face different marginal costs of pollution abatement. As long as firms' marginal costs of abatement are not equal, it is possible to reduce total costs by redistributing the abatement between firms. Only when marginal costs are equal across firms is the given level of pollution abatement being achieved at the lowest possible cost. previous
Emission taxes are advantageous because firms have:
Emission taxes are advantageous because firms have a profit motive to find the most efficient abatement strategies. Specifying how polluters should abate pollution is not required because the profit motive will lead firms to find the most efficient abatement techniques to avoid paying the tax. Emissions taxes lead profit-maximizing firms to abate pollution in a cost-minimizing manner. If the tax is set equal to the marginal external cost of the pollution, the externality will be fully internalized and the allocatively efficient amount of pollution abatement (and output) will be produced.
Emission taxes:
Emission taxes encourage innovation. Emission taxes create an incentive for innovation. An emissions tax attaches a price to any amount of pollution, causing firms to have an ongoing financial incentive to innovate in order to reduce emissions. In contrast, with direct controls, firms are required to reduce pollution only to the point where the regulation is satisfied; there is no economic incentive to reduce further. As long as the emissions tax is in place, firms will continually be trying to reduce their emissions, which will spur innovation.
GHG emissions reductions will likely be accomplished by:
GHG emissions reductions will likely be accomplished by reducing the GHG intensity of energy. GHG emissions equals GHG = (GHG/Energy) x (Energy/GDP) x GDP, where "GHG" is the world's annual emissions of greenhouse gases, "Energy" is the amount of energy consumed globally per year, and "GDP" is the world's annual gross domestic product. (GHG/Energy) is the GHG intensity of energy and (Energy/GDP) is the energy intensity of GDP. To reduce global annual GHG emissions, at least one of these three components must decline. GDP: The typical growth in world GDP will lead to growth in GHG emissions of between 4 and 5 percent per year. (Energy/GDP): An approximately 1.5 percent annual reduction in energy intensity is expected (not enough to balance anticipated GDP growth). (GHG/Energy): To achieve sizable reductions in the annual flow of global GHG emissions, the GHG intensity of energy needs to be significantly reduced.
If firms completely internalize the externality (i.e., pollution), then the __________ optimal level of output is achieved and the social marginal cost __________ the social marginal benefit.
If firms completely internalize the externality (i.e., pollution), then the socially optimal level of output is achieved and the social marginal cost equals the social marginal benefit. Internalizing the externality is a process that results in firms taking account of a previously external effect. At the optimal level of output, where the externality is completely internalized, consumer prices would just cover the social marginal cost of production. Then the familiar condition for allocative efficiency, that social marginal benefits are just equal to the social marginal cost of producing these benefits, prevails. Reducing output increases allocative efficiency and makes society as a whole better off.
If polluters are charged to pollute, then:
If polluters are charged to pollute, then less pollution is a probable result. When polluters are charged, the process shifts at least a portion of the external costs back to the producer. As producer costs increase, there will be less production and less pollution. In many cases, the higher pollution cost may make the marginal benefit of adopting pollution abatement technologies exceed the marginal cost of those technologies. Pollution will never disappear unless all productive activity ceases. Charging polluters to pollute should reduce the damage to the economy assuming they are currently producing and polluting without being charged. Additional Learning We have to be rational environmentalists since there is some minimum level of pollution that must be accepted to be able to produce enough to satisfy societal needs.
One method which has generated a great deal of controversy as an approach to managing global climate change is:
One method which has generated a great deal of controversy as an approach to managing global climate change is cap-and-trade. Cap-and-trade legislation would set a maximum limit on total carbon emissions and then issue tradable emissions permits that would be bought and sold on some type of exchange. The goal is that over time the limit could be reduced, thus reducing the environmental impact. Outsourcing manufacturing may reduce emissions but does not reduce global emissions. And, limiting auto ownership would never be considered as an option to reduce emissions in Canada.
One reason pollution limits are difficult to implement is due to the:
One reason pollution limits are difficult to implement is due to the high cost to monitor compliance. Pollution limits are difficult to implement because it is difficult to assign individual limits and then very costly to monitor compliance afterwards. Implementing limits would be more likely to result in job loss since production would typically fall as a result of the limits. Additional Learning Setting pollution limits are one of the ways governments attempt to cope with pollution.
Optimal abatement is difficult to ascertain because pollution abatement technology is ___________ and the health consequences and other costs associated with various pollutants are ___________.
Optimal abatement is difficult to ascertain because pollution abatement technology is constantly changing and the health consequences and other costs associated with various pollutants are not easily measured. Accurate estimates of pollution abatement technology and the consequences of pollution are often difficult to obtain. Technological advancements are frequently ongoing and unpredictable, and varying measures often over- and under-estimate the costs based on desired outcomes. Even consensus on global climate change is subject to skepticism about the magnitude of the effects of climate change, human culpability, and the resulting costs.
Profit-maximizing firms minimize costs by:
Profit-maximizing firms minimize costs by treating pollution as an externality. Polluting firms that are profit maximizers fail to account for the cost of polluting when producing their products. As a result, they produce too much output. Reducing output would increase allocative efficiency and make society as a whole better off. Profit-maximizing firms ignore the external effects of their polluting because their profits benefit from the omission.
Strong public support for the development of alternative energies (i.e., solar and wind) and changing consumer preferences (i.e., electric cars) will:
Strong public support for the development of alternative energies (i.e., solar and wind) and changing consumer preferences (i.e., electric cars) will reduce GHG emissions significantly. Many key global polluters (i.e., China) are increasing their adoption of alternative energies, and some environmentally friendly consumer durables, such as electric cars, are becoming more popular worldwide.
Tension exists between developed and developing nations due to:
Tension exists between developed and developing nations due to conflicting opinions and national self-interest. Global participants have varying incentives for limiting their response to climate change. Reducing GHG emissions can be expensive and burdensome. Some countries are worried "free riding" may occur. Nations may also be concerned that wealth and power could be diminished if alternative energies (i.e., solar) are widely adopted. Self-interest is a powerful motivator for most countries when contemplating their reaction to climate change.
The idea of a pollution tax is to internalize the externality, which happens when the tax:
The idea of a pollution tax is to internalize the externality, which happens when the tax equals the external cost. The tax shifts the cost back to the producer and consumer and away from the third parties currently bearing the cost. A tax that is lower than the external costs does not internalize all of the costs. And, a tax greater than the external cost reduces output even further and could result in an external benefit.
The marginal cost of eliminating the first 20% of pollution is __________ the marginal cost of eliminating the last 20% of pollution.
The marginal cost of eliminating the first 20% of pollution is much less expensive than the marginal cost of eliminating the last 20% of pollution. Pollution abatement experiences diminishing marginal returns just like other activities. For this reason, society has to determine the optimal level of pollution which occurs at the point where the marginal benefit of one more unit of pollution abatement equals the marginal cost of that abatement. It is easier to justify expending resources on eliminating the first 20% of pollution since the cost per unit reduction is cheaper.
The price of tradeable pollution permits will decrease if:
The price of tradeable pollution permits will decrease if abatement technology improves. The equilibrium market price for pollution permits is determined by government policy (supply) and by firms' technology of pollution abatement (demand). Given the quantity set by government policy, the equilibrium price is determined by firms' demand for pollution permits. At the equilibrium price for pollution permits, the number of permits demanded by firms will exactly equal the number of permits issued by the government. As technological advances occur that reduce the marginal costs of pollution abatement, profit-maximizing firms will choose to abate more pollution. As a result, improvements in abatement technology will lead to a reduction in the demand for pollution permits and a reduction in their equilibrium price.
Which of these best represents a tax equal to the value of the negative externality?
The vertical distance between S1 and S2 best represents a tax equal to the value of the negative externality. The tax is equal to the difference between the private cost and social cost. P1 is the equilibrium price prior to the tax. P2 represents the price consumers pay after the imposition of the tax.
Through the natural respiration of forests and absorption by the oceans, Earth can absorb about ____________ of GHGs every year.
Through the natural respiration of forests and absorption by the oceans, Earth can absorb about 5 billion tonnes of GHGs every year. The world's total emissions of greenhouse gases (GHGs) is currently approximately 50 billion tonnes of CO2e annually, two-thirds of which are related to the production or consumption of energy—residential and commercial heating, transportation, electricity generation, and industrial processes. As the world's emissions of GHGs rose above Earth's absorptive capacity, the gases began to accumulate in the atmosphere.
Under a policy strategy in which a government imposes an emissions cap and issues tradable emissions-allowance permits to firms, the government:
Under a policy strategy in which a government imposes an emissions cap and issues tradable emissions-allowance permits to firms, the government seeks to cap nationwide emissions and then distributes emission-allowance permits across firms. Under this strategy, the government will set the maximum allowable emissions below current levels and gradually reduce them over time. Firms that cannot immediately meet the lower emissions can buy permits from other firms. Over time this should incentivize lower overall emissions and a gradual transition to production processes that are more environmentally friendly. Limiting the amount an individual firm could buy or sell would not have the macro impact desired and unlimited permits would do little to reduce emissions unless the permits were costly to procure.
With tradable pollution permits, profit-maximizing firms will __________ pollution until their marginal abatement costs __________ the price of pollution permits.
With tradable pollution permits, profit-maximizing firms will reduce pollution until their marginal abatement costs equal the price of pollution permits. As firms reduce pollution, they require fewer pollution permits. The price of the pollution permit is the firms' marginal benefit of abatement. Low-abatement-cost firms will sell pollution permits to high-abatement-cost firms. Firms buy and sell permits until the marginal cost of abatement is equal across firms. Marginal abatement costs equal the price of pollution permits. A given amount of pollution abatement is being achieved at the lowest possible cost, and both types of firms are better off than when they are subject to direct pollution controls even though the total amount of pollution abatement is unchanged.