Environmental Econ 2

Hybrid instrument

-C+T program with flexible supply -reserve price and high-price trigger for additional allowances -reduces price risk

Uniformity of standards

-Equimarginal principal must hold: in order to get the greatest reduction in total emissions for a given abatement cost, the different sources of emissions must be controlled in such a way that they have the same MAC -to do this, authorities must know what the MACs are -identical standards only cost-effective in unlikely event that all polluters have the same MACs -the greater the differences, the worse will be the performance in equal-standard approach

Types of emissions standards

-Technology standard: use specific control technique -Emissions standard: limits pollutants to certain concentrations -Ambient Environmental quality: quality of environment at certain exposure point **None of these specify population exposure

Least Cost Theorem (Perman et al.)

-a necessary condition for abatement at least cost is that the marginal cost of abatement be equalized over all abaters -this means they will not be abating equally -low cost abates will undertake most of total effort

Ambient Standards

-a never-exceed level for some pollutant n the ambient environment -cannot be enforced directly, but the inputs can be (i.e. emission standard for DO content in a river) -normally expressed as average concentration levels over some period of time

how to achieve the optimal level of emissions at least cost?

-a pig tax or a cap and trade program will work, even if you give out the allowances for free -but, you are giving up your opportunity cost of the money you could get in auction -you could lower other taxes/ other S.F. expenditures, which could earn more than a dollar back for each dollar spent -but, super firm can also be quite inefficient -second dividend

How to find aggregate MAC function?

-add together individual MAC curves horizontally (pick spot on y axis and add points on curves)

Credit training (CRE) programs

-allows firms to sell the credits they create by reducing their emissions more than is required under existing regulations -can accommodate more firms/ expanded operations without an emissions increase

Marketable emissions permits

-any increase in emissions offset by equivalent decrease elsewhere -permit can be freely traded -differ from tax/ subsidies by working in terms of quantities rather than prices -should have same effect if permit price is equal to tax or subsidy rate

Total damages on graph

-area under MD curve

Deposit-Refund Systems

-combination of a tax and subsidy -subsidies for disposing of harmful items at designated collection point -funds for the subsidies raised by taxes on the item when purchased -works well but monitoring is different

Moral Considerations

-distributional questions -efficient policies sometimes seen as unethical by the public (shouldn't reward firms with subsidies)

Pollution taxes vs. emissions abatement subsidies

-distributions of gains and losses will differ -taxes involve net transfer of income from polluters to government, while subsidy goes in other direction -so firm gains income from subsidy, and loses income from tax -but, incentive effects identical -subsidy is different because has a lump sum payment independent of the amount of abatement, which may alter industry profitability in the long run

Standards and Incentives w Command and Control

-doesn't create strong incentives to do better than the standard, so firm won't go below E* even if their costs are low. Also the last few units of emission reduction may be more costly than the damages reduces

Key features for designing a system (Schmalensee and Stavins)

-don't require prior approval of trade for low transaction costs -robust markets require a cap to be significantly below BAU -establish final rules before compliance period to avoid price volatility -compliance through accurate monitoring and penalties -banking maximizes gains from trade -price collars reduce price volatility and costs -economy-wide systems feasible, but downstream/ sectoral more common

Statutory liability laws

-effectiveness depends heavily on specific formulas -can provide correct incentives only if the compensatory payments from each polluter approach the actual amounts of damage they cause

Why are policies that make allowance prices low bad?

-entrepreneurs will not have the incentive to invest in ways to lower costs through technology -we have sent a signal to society that social MAC is lower than it actually is

Allocate permits for free

-equilibrium price will be identical

Abatement subidies

-firm is paid per ton of emission it reduces, starting from some benchmark level (this acts as opportunity cost) -total emissions could increase if higher total revenue makes the industry more attractive for new firms

Nonuniform emissions

-firms are not uniform in their impact on ambient levels -a single emission charge applied to both sources not efficient -if firm with high impact buys from firm with low impact, there is more damage -could adjust trading rules to take into account impacts of individual sources (source A might have to pay the price of 2 permit to get 1) -or could use a zoned system to minimize complication

Banking

-firms can save allowances for high cost years or borrow from low cost years -this means prices depend on cumulative limit on emissions (sum of annual caps) -firms will bank/ borrow up to point where ROR = ROR on similar investment

Political Considerations for program (Schmalensee and Stavins)

-free allowance allocations can address equity concerns BUT, you can't use revenue -emissions leakage and adverse competitiveness = huge political concern -complimentary policies reallocate, not reduce emissions

Bargaining (Perman et. al.)

-generally used to internalize externalities -environmental problems can have huge transaction costs because so many people are affected and large number of sources -intertemporal bargaining: between current and future generations

Material Balance Issues

-given a certain quantity of residuals, if the flow going into one medium is reduced, the flow going into another will increase

Initial Rights Allocation

-giving each polluter same permits not fair because firm size varies -also unfair to give based on emissions, because some firms have already tried to reduce -but, it doesn't matter too much unless there is a monopoly because end distribution is the same

Cap and trade programs

-gov decides Q, permits either auctioned off or given away for free -firms act according to their MAC -to be cost effective, there should be single market with public knowledge of transaction prices/ open interaction -supply is Q of cap, demand is aggregate MACs -works best with substantial competition so traders can't collude on price -incentive for R&D so you can reduce more and sell permits

Transferable discharge permits

-government establishes a charge rate and then monitors the performance of each polluter, and collects tax bills

Double dividends hypothesis

-if you use revenue from pollution tax to reduce marginal tax rates while keeping government services the same, you can get additional social welfare -this is because taxes have DWL because people behave according to after-tax evaluation, which isn't their true preference -most expensive DWL is at the margins - we want to earn this back -but the tax raises the price of goods that have the emissions as an input, lowering real wages (reduction in labor adds to DWL) - this interaction effect could outweigh gains -in long run, double divided likely to outweigh interaction

Public Goods

-imply free-riding, so decentralized approaches such as property rights systems won't bring about efficient outcomes

Decentralized policies

-individuals involved work out a solution -strong incentive to find one because parties involved are the ones producing AND suffering -those involved have the best knowledge of damages and abatement costs, so its easier for them to find efficient solutions

Liability laws

-issue with compensation: without being able to trace pollution, compensation can be difficult -legal costs = transaction costs -efficient when: relatively few people involved, causal linkages are clear, damages are easy to measure

When is C&T most efficient? (Schemalensee and Stavins)

-large differences in abatement costs -high degrees of mixing, because you don't need to worry about worry about hotspots -need to be well designed!

Efficiency

-maximize summations of willingness to pay net the costs of achieving it (max net benefits to society) -as close as possible to point where MAC = MD

Cost-effectiveness

-minimize the cost of achieving a certain outcome (environmental improvement) or allocating the smallest amount of resources to pollution control -don't need to measure WTP -necessary for efficiency -complicated by asymmetric info -minimum opportunity cost

Fairness (equity)

-must weigh efficiency and distribution

Emission standards

-never-exceed levels applied directly to quantities of emissions coming from pollution sources -usually quantity of material per unit of time -performance standard - meant to be achieved by regulated polluters -incentive for R&D determined by compliance costs: tech will lead to reduction in abatement costs + tax payments -tax revenues can provide double dividend, but predicting is difficult because MAC curves unknown -large monitoring costs

Command and Control instruments

-non-transferable emissions licenses: each firm's initial allocation of pollution licenses sets the max amount of emissions that is allowed -information asymmetries - polluters don't have an incentive to provide unbiased info about MACs Minimum tech requirements: not cost efficient but achieve reductions quickly

Why is direct regulation a poor choice? (Ruff)

-once polluter complies, they have no incentive for R&D -instead, set an acceptable level and let them find cheapest way or subsidize the reduction of pollution

Distribution impacts of emissions charges

-price of consumer goods may go up (hurts poor more) -tax revenues may benefit society

Inelastic supply with allowance trading causes..

-price volatility

Rationale for managing prices

-prices that are higher than anticipated would impose larger costs on firm/ households and could hurt international competitiveness in energy sector -prices that are lower than expected could fail to motivate firms to invest in equipment or lower-cost tech for reduction - this would increase future cost

Coase theorem rules and conditions

-property rights must be well defined, enforceable and transferable -there must be efficient/ competitive system where people can negotiate on environmental property rights -there must be complete set of markets so private owners can capture all social values associated with the environmental asset

Liability

-property rights vested in the party adversely affected by the action -where harm is a public good, use of liability to make polluter pay is usually not feasible

Allowance trading

-quantity certainty, price uncertainty -auction or give away for free (bargaining will happen either way) -when MAC is high, price is high (vice versa, price moves up and down with MAC curve)

Emissions coupons

-reallocates ownership, but doesn't change MAC curve -can do with auction or exchange -optimally set tax or trading system both result in P.O.

Technology Standards

-specify the technologies, techniques or practices that potential polluters must adopt -incentives for R&D become zero

Taxes vs. Subsidies (of equal value)

-superficially, they should have same marginal effect on firms -either one raises MC curve for firm - we expect a smaller supply from the industry -but, firms must make minimum of their average variable cost to keep producing -subsidies lower ATC for firms relative to a tax -subsidies lower shut-down point, taxes raise them -subsidies will lead to firms starting up at lower prices, so industry supply curve will shift down relative to supply curve with tax -emissions could even go up if subsidy supply curve crosses the demand curve at a higher quantity level and demand response is large -tax will always shift the aggregate supply curve up and lower the quantity of the good produced (and hence emissions) -same effect at margin, but not on the shut-down point

Government Failure

-systematic tendencies and incentives within gov agencies that work against efficient and equitable public policies -to reduce this, policies should have clear objectives, well-desired means, and transparent ways of addressing results

Enforceability

-takes time/resources -monitoring + sanctioning

Incentives for tech. improvement

-tech change shifts MAC curve down, so we want policy to provide incentive for people to find new/innovate ways to reduce impact

The efficiency of competitive markets depends on...

-the identity of private costs and social costs: -when they diverge, private profit-max decisions not socially efficient (Ruff) -so, if you put a price on pollution close to the MSC, private decisions become efficient

Transfer payment

-the tax revenue is just movement of money from one group to another

If abs value of slope of MAC > slope of MD,

-then choose price instrument (P tax) -this is because difference in E for a set P will be relatively small, so risk in E is smaller than risk in P -the difference in P for a set E will be relatively large, leading to loss in surplus -or, hybrid

to make a firm do what is "good for the country" or socially optimal...

-they should be paying their full MSOC of production

Equimarginal principle

-to get the minimum aggregate MAC curve, the aggregate level of emissions must be distributed among sources so that they all have the same marginal abatement cost

Social responsibility

-using education/ the media -environmental labeling

Selling permits at auction

-when the received bids are ranked in descending order to bid price, the resulting schedule can be interpreted as a market demand curve for permit -permits will be purchased whenever the price < additional abatement costs

Pigouvian Tax

-you set the price, so changes in MAC curve cause quantity variability -this could cause really high MD

Emission charges (an incentive based strategy)

Either: 1. charge for each unit of emission (emissions taxes) 2. give a subsidy for each unit of emission that the source cuts back

Benefits of pollution =

costs of pollution abatement

With multiple emitters, costs will be minimized when..

marginal costs are equalized across all sources

If there is a bank, MAC must be rising at

the interest rate

If abs value of slope of MAC< slope of MD,

then choose allowance trading