ACE 210 Exam 2

incentive based environmental policies (2 types)

-Public authorities set objectives and rules. -Then, firms can find the best ways in which they can meet those objectives. 1. Taxes and subsidies 2. Market>based system

Total Maximum Daily Load Program

1. The state establishes a maximum level of pollutants that a water body can receive. 2. Point sources and nonpoint sources are identified. 3. Total daily load is allocated among the different sources (very difficult in practice)

common law

A system based on the claims and counterclaims made plaintiffs and defendants, where juries usually decide on the verdict and compensation. !Two major steps: 1. Establishing causality: Pollution"Damages 2. Assigning responsibility: Source"Pollution"Damages !Costly process: legal costs to both parties in order to prove/disprove causality and responsibility.

Technology-Based Effluent Standards

According to the Clean Water Act, the EPA must establish effluent standards for industrial facilities and sewage treatment plants (publicly owned treatment works). The EPA defines the available technology, and then establishes effluent standards based on these technologies. This requires a careful study of all the available options. The EPA sets these standards for categories of polluting sources, based on the available technology for each type of source

command and control

An approach where a specific behavior is mandated by law, and people are made to follow this behavior, through the enforcement of the law.

cost effectiveness

Application of the equimarginal principle: when in compliance, do different sources have the same MAC? No A source must use the standard that has been set for their particular industry. Sources with different MACs, are required to apply the same standard. EPA has defined 600 subcategories of water-polluting industries.

efficient

Balance between damages and abatement costs. TBESs are applied at a national level Same standard applies to all factories from a given industry, no matter where they're located. Efficiency would require that different sources are treated differently.

liability laws

Called also be called 'responsibility' laws"Implies the existence of a compensation !The principle: if polluters know that they can be made liable for the damages from their emissions, then they would internalize the externality. !In other words, since they would have to pay for the damages they cause, these would be taken into account when deciding on their level of emission. "The external cost of their emissions, is now part of their internal decision.

nonconventional water pollution

Chemical oxygen demand, total organic carbon, phosphorous. (Sources: fertilizers, sewage, manure, and detergents)

toxic water pollution

Chemicals and metals discharged from industrial sources.

types of water pollution

Conventional Nonconventional Toxic

Double Dividend Hypothesis

Could replace unproductive taxes (on labor, or capital) with taxes on emissions, that reduce emissions. However, the exact amount of tax revenue that would be collected would be uncertain.

moral suasion

Create a compelling about the moral importance of maintaining environmental quality.

incentives to innovate

Does the policy provide incentives for private parties to develop new ways of reducing their environmental impacts?

Tradeoff between emission taxes and standards

Emission taxes: Minimize the total cost of abatement when MACs are different across sources. But... Lead to uncertain reductions in emissions.

options for distributing cap and trade permits

Equal distribution among all the polluters - Problem: Not all the sources are of the same size Based on existing emissions and the reduction target (e.g. 50% of current emissions) -Problem: Could potentially punish more efficient sources and create perverse incentives for the future. Auction of permits: Regulators could receive some of the value from the permits. -Problem: political feasibility Hybrid system: free distribution and auction

TBES incentive to innovate

Even weaker incentives to innovate Sources can just adopt the technology in order to comply with the regulation. No real incentive to find cheaper ways to do abatement.

Marginal penalty function (MPC)

Expected penalties for violating an emission standard

emission taxes

Firms don't have pay for their 'use' of the environment and the damages caused by their emissions - Externality Firms have to pay a tax for every unit of emission. - Effectively put a price on the emissions. - Polluters have an incentive to reduce their emissions.

Paradox of the sanctioning process

Higher sanctions could actually lead to more violations of the law. < If courts are more reluctant to impose these higher sanctions (lower probability of being sanctioned)... < Then this could lead to a lower expected value of the sanctions, leading to more violations of the law.

equity

How should the costs and benefits of environmental improvements ought to be distributed among members of society.

what should the tax be set at?

If we know MAC and MD, then choose t* so that MAC = MD

emissions tax enforcement cost

In order to tax emissions, tax authorities need to know exactly how much is being emitted. And they should be measurable at a reasonable cost. Practical options: - Permanent monitoring - Possible if there are few sources. - Periodic monitoring of the rate of emissions and extrapolation for the whole period (month, year, etc). - Estimates from engineering studies.

Abatement subsidies

Instead of charging for emissions, we could subsidize the reduction of emissions. Pay polluters a given amount for every unit of emissions reduced"Opportunity cost of emissions. For each polluter, this creates the same incentive as a tax. Could end up with higher emissions than without the subsidy There is an incentive for new firms to enter the market. Equivalent to subsidizing a production input.

Decentralized policy

Interactions between decision makers reveal information about MAC and MD.

how do taxes change quantity demanded (who ends up paying for tax?

Less sensitive consumers will lead to reductions in the quantity in a lower proportion than the increase in prices. More sensitive consumers will lead to reductions in the quantity in a lower proportion than the increase in prices.

incentive to innovate with abatement subsidies

Less than with a tax ! Less than with an emission standard (when there's no ratchet effect)

emission standards

Limits on the quantity of emissions from pollution sources. !Usually expressed as a quantity per unit of time (e.g. grams/minute)

informal community

Loss of reputation imposes a real cost on polluters.

2 steps for enforcement

Monitoring: Compare the performance of pollutants against the requirements of the regulation (are they doing what they are supposed to?) !The level of compliance is private information. Regulators have to spend resources in order to acquire it. 2. Sanctioning: Punishing those who do not comply with the regulation. !Requires resources as well. !It has to be proven, beyond any reasonable doubt, that there was in fact a violation of the law.

persistant pollution

Nondegradable pollutants or pollutants with very low rates of degradation.

Differences in the marginal damages

Policy tradeoff: Setting different standards in each situation is economically efficient, but... is costlier because more information is needed And, Makes it harder to enforce (higher enforcement costs)

degradable pollution

Pollutants that undergo biological, chemical and physical processes that change their characteristics (includes oxygen-using chemical processes)

offset trading

Polluters can voluntarily decide to offset some of their emissions. Buyers of offsets, pay the sellers in exchange for their commitment to reduce emissions.

effiiency

Produces the maximum net benefits for society. where marginal abatement costs and marginal damages are equal (MAC = MD)

firms optimal response to emissions tax

Reduce the emissions up to the point where MAC = Tax

progressivness

Refers to the distribution of net benefits by income level"A policy is considered progressive if lower income groups receive a higher share of the net benefits (it is considered regressive if the opposite is true).

cap and trade system

Regulators can (1) set a cap of emissions, (2) Allocate permits among polluters"A permit allows the polluter to emit fixed amount (3) Set the rules for trading these permits Demand for permits will be given by the MAC of all polluters Supply will be fixed a the level determined by the regulator

ambient standards

Relates to the level in the ambient environment (air, water, soil). !Cannot be enforced directly"Enforcement on the sources of emissions that lead to ambient quality levels (relationship between emissions and ambient levels).

zone emission charge

Sources in the same zone pay the same tax, but each zone has a different tax. Administratively more tractable. ! Recognizes differences for the contribution of each source

technology standards

Specify the technologies, techniques or practices that polluters must adopt.

emissions taxes with different MACs

Taxes are cost-effective - They apply the equimarginal principle. Each source will reduced emissions until MAC = t*. The source with the less steep MAC will do more abatement and pay less in total taxes The source with the steeper MAC will do less abatement and pay more in total taxes

Incentives to innovate

Technology standards create no incentive to innovate (meet the standard by adopting the technology/practice).

advantages of decentralized approach

The parties involved have the incentive to find a solution. !They also have more information"know MAC and MD.

Application of the equimarginal principle

To minimize the total cost of abatement, we need to equalize the abatement costs across the different sources.

emissions tax with nonuniform emissions

We would to charge each source, a different emission tax. However, this is usually not feasible (regulators would need to know exactly how much each source contributes to environmental quality)

ratchet effect

an adjustment to the emission standard when the MAC changes

conventional water pollution

biochemical oxygen-demanding wastes (BOD), total suspended solids (tss), bacteria, fecal coliform (FC), oil, grease, and pH.

Coase Theorem

Necessary conditions: 1. Property rights must be well defined, enforceable and transferable. 2. Efficient system for trading (low transaction costs). 3. Complete markets for environmental assets.

decentralized approach

The individuals concerned with the environmental pollution, are the ones who end working a solution between themselves. !There is no 'central' determination of what the appropriate level of emissions is.

Emission Trading for Water Pollution

These programs are more limited in terms of their geographical scope, than similar programs for air pollution. Limited to the sources located near the body of water. Limits the number of buyers and sellers in the market Markets are more competitive when the number of buyers and sellers are larger.

standard

a mandated level of performance that is enforced by law. 3 types: Ambient Emission Technology

transaction cost

if they are high enough, the socially efficient level might not be reached.

Cost effectiveness

implies that the given an objective for environmental improvement, that objective can be achieved at the lowest possible cost. a necessary but not sufficient condition for efficiency. If policies are not cost>effective, then reductions in pollution levels/emissions could actually be lower than what would be socially efficient.

centralized policy

requires that some control administrative agency be responsible for determining what is to be done. !Knowledge about the MD and MAC."Measurement issues.

cap and trade incentive to innovate

same as emission tax

Zero risk level

the level at which no one suffers any damages. The abatement costs are not taken into account. If there is no threshold level for emissions (i.e. damages start with the first unit of emissions), then this is not practical. If we want to set a standard that is economically efficient, we need to take into account the abatement costs

is there uncertainty with emissions tax

yes

how do emissions tax give an incentive to innovate

Given that polluters have to pay more with an emission tax than with a standard, the incentives to innovate will also be larger. new vs old technology