Pollution Management: Economic Instruments and Policy Selection, Slides of Environmental Economics

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Pollution management

Haripriya Gundimeda

Why pollution occurs?

• Environment a public good

• Lack of well defined property rights for

environment

• Market failure

• Externalities

Problems with Pollution taxes

• Setting of tax rate

• Full information on abatement costs and

transfer coefficients

• Revision In tax rates when new entrants come to

the region

• Undesirable impact is brought by a number of

pollutants

• Equity grounds

• Redistributive effects on households

• Uncertain effects

Subsidies

• Subsidies are a form of financial assistance offered to a

producer by regulators

• Used as an incentive to encourage pollution control or

mitigate economic impact of regulations

• E,g, grants, loans, tax allowances
• Water pollution control subsidies (France), subsidies for

solid waste recycling (Italy), financial assistance to

produce technology to control pollution (Netherlands),

reduce pesticide loadings ( Sweden), construction of

municipal water treatment plants (United states),

Selection of Policy Instrument

Number of criteria -

• Static Cost Efficiency – Is the PI least costly from

firm’s point of view?

• Dynamic Cost Efficiency (dAC/dt) – Does it give

adequate incentive to a firm to continuously

innovate so as to ¯ pollution?

• Goal Fulfillment – Will the PI fulfill the goal for

which it is intended? – e.g., mercury reduction

• Administrative Costs – What will be the

administrative costs of implementing?

Selection of Policy Instrument

Criteria contd. -

• Barrier to Entry – Will the implementation of PI

create barriers for entry of new firms

• e.g., standards are usually for newer firms/units, thereby protecting older plants.
• Older vehicles not covered under EURO II norms.
• Polluter Pays Principle – Is the polluter paying for

the externality?

• Politics of Implementation (Acceptability) – Is it

acceptable to all the parties concerned?

Instruments and sample applications

Policy Instrument Natural Resource Management (Water, fisheries, agriculture, forestry, minerals & biodiversity) Pollution Control (Air, water, solid waste & hazardous waste) 1 Direct Provision Provision of parks Waste Management, Timer at intersection 2 Detailed Regulation Zoning, Regulation of fishing (e.g., dates and equipment), Ban on ivory trade to protect biodiversity Catalytic Converters, traffic regulations etc., Ban on chemicals (Azo dyes) 3 Flexible Regulation Water quality standards Fuel quality, CAFÉ 4 Tradable quotas or rights Individually tradable fishing quotas, Transferrable rights for land development, forestry or agriculture Emission permits 5 Taxes, fees or charges Water tariffs, park fees, fishing license Waste fees, congestion pricing,, gas taxes, industrial pollution fee 6 Subsidies and subsidy reduction Water, fisheries, reduced agricultural subsidy Energy taxes, reduced energy subsidies

Policy Instrument Natural Resource Management (Water, fisheries, agriculture, forestry, minerals & biodiversity) Pollution Control (Air, water, solid waste & hazardous waste) 7 Deposit- refund schemes Reforestation deposits or performance bonds in forestry Waste management, used vehicles, vehicle inspection 8 Refunded emission payments NOx abatement in Sweden 9 Creation of property rights Private national parks, property rights and deforestation 10 Common property resources CPR management 11 Legal mechanisms, liability Liability bonds for mining or hazardous waste 12 Voluntary agreements Forest Products Toxic Chemicals 13 Information Labeling of food, PROPER and other

U.S. Market for SO2 Allowances

• Sulfur dioxide (SO2) is a primary product

of coal-burning power plants.

• SO2 pollution lowers the pH scale of

rainfall, leading to the problem commonly

known as acid rain.

– Increased acidity of lakes and rivers.

– Slower growth, injury or death of forests.

– Visibility impairment.

• SO2 can impair respiratory function and

is linked to a variety of respiratory

ailments.

What Are Allowances?

An allowance authorizes a unit within a utility or industrial source to emit

one ton of SO2 during a given year or any year thereafter.

At the end of each year, the unit must hold an amount of allowances at

least equal to its annual emissions, i.e., a unit that emits 5,000 tons of

S02 must hold at least 5,000 allowances that are usable in that year.

Allowances are fully marketable commodities. Once allocated,

allowances may be bought, sold, traded, or banked for use in future

years. Allowances may not be used for compliance prior to the calendar

year for which they are allocated.

U.S. Market for SO2 Allowances

How Are Allowances Allocated?

Allowances are allocated for each year beginning in 1995.

In Phase I, EPA allocates allowances to each unit at an

emission rate of 2.5 pounds of SO2/mmBtu (million British

thermal units) of heat input, multiplied by the unit's baseline

mmBtu (the average fossil fuel consumed from 1985 through

Roughly 440 units are involved in Phase 1

U.S. Market for SO2 Allowances

…In Phase II, which began in 2000, the limits imposed on

Phase I plants are tightened, and emissions limits are also

imposed on all SO2 emitting units (another 2000 or so

units).

EPA allocates allowances to each unit at an emission rate of

1.2 pounds of SO2/mmBtu of heat input, multiplied by the

unit's baseline, which effectively places a cap at 8.95 million

on the number of allowances issued to units each year.

U.S. Market for SO2 Allowances

How is Compliance Determined?

At the end of the year, units must hold a quantity of

allowances equal to or greater than the amount of SO

emitted during that year.

What Is The Penalty for Noncompliance?

Penalty for noncompliance: $2000 per ton over, with

inflation it is now about $3000 per ton.

Firms have a year to offset excess emissions by purchasing

permits. Very rarely are firms out of compliance.

Market for SO2 Allowances

Market for SO2 Allowances