Flashcards in Pollution Instruments Deck (21)
What is the least cost theorem of pollution control?
Cost efficient and cost effective pollution control instruments achieves abatement at the least cost. Abatement at the least cost needs the marginal cost of abatement to be equalised for all abaters.
Name the three main types of PCI's
1. Institutional approaches to faciliate internalisation of activities
2. Command and control instruments
3. Economic incentive (market based) instruments
When is an instrument cost effective?
If an instrument can obtain the abatement target at a lower real cost than any other can. It involves allocating the smallest amount of resources to achieve a given target.
What is the problem faced by the government to meet that target level of abatement Z at least cost?
min: C(A) +C(B)
st: Z(A) +Z(B) = Z
The solution to this problem yields the result that the marginal cost of abatement be equalised across all abaters. The marginal cost for both firms is equal to mu known as the shadow price of constraint. The shadow price of constraint gives the impact on the minimised TOTAL cost of abatement of a small relaxation of the target level of abatement.
What is a potential disadvantage of equalised marginal abatement across all abaters?
A least cost solution will in general not involve equal abatement effort by all polluters. Where abatement costs differ cost efficiency implies that relatively low cost abaters will undertake most of the total abatement effort.
Explain the different insitutional approaches to facilitate internalisation of externalities.
I) Facilitation of bargaining - Cost of bargaining is reduced assigning property rights. Bargaining is feasible only when few people are involved. Bargaining between current and future generations cannot really occur.
II) Specification of liability - Codification of liability for environmental damage. Liability for damages caused could be an incentive that induces the potential injurer to unertake the efficient level of precaution. Difficult to implement where damage become apparent only long time after the relevant pollutants were discharged
III) Development of social responsibility - Education and socialisation programmes promoting citizenship. It can be a powerful means to ahieve environmental goals
Command and control instruments are the dominant method of reducing pollution. Name the different instrument categories of command and control instruments.
1. Technology control
2. Emissions licenses
3. Location control (zoning, planning controls, relocation)
Explain the use of technology controls as a command and control instrument
Minimum technology requirements are imposed upon potential polluters. Sometimes specific tenchiques such as flue-gas de-sulphurization are mandated.
Examples include best practicable means (BPM), best available technology (BAT) and best available technology not entailing excessive cost (BATNEEC).
The instruments are not usually cost efficient because they do not focus the abatement effort on the polluters that can abate at least cost. The inefficiency stems from that any decision about how to reduce emissions is decided centrally an environmental agency (such as the EPA), rather than decentralised to the firms.
However they do achieve large reductions in emissions quickly, particularly when technological solutions are available but not widely adopted.
Explain the use of non transferrable emissions licenses as a command and control instrument
The EPA creates licenses (or permits/quotas) for a particular pollutant which it then distributes to emission sources. The licenses are non transferrable meaning each firms initial allocation is the maximum amount of emissions that it is allowed.
Disadvantages to the functioning of non transferrable emissions licenses occur if polluters believe that their actions are not observed or if the cost of abatement is relatively lower than the cost of penalty. Solutions to this include monitoring and penalties to non compliance.
Although possible under special conditions, why would the utilisation of license emissions not achieve the emissions target at the least cost?
Because cost efficiency requires the marginal cost of abatement to be equal across all abaters, the costs for the EPA of collecting each polluters abatement cost function could be prohibitive and may outweight the potential efficiency gains. Those who have the information have no incentive to provide this to the regulators in an unbiased form.
Explain the use of location controls as a command and control instrument
Pollution control objectives could be met by separating the location of people an pollution sources.
Note that this is only relevant where the pollutant is not uniformly mixing. Uniformly mixing pollutants are dispersed quickly and there spatial dispersion is uniform (e.g. GHG). Non uniformly mixing pollutants spacial distribution is not uniform (e.g. ozone accumulation in lower atmosphere, oxides of nitrogen and sulphur in urban airsheds)
Name the different categories of economic based (market incentive) instruments
a) Emissions charges/taxes
b) User charges/fees/natural resource taxes
c) Product charges/taxes
a) Emissions abatement and resource management subsidies
b) Deposit refund systems
c) Liability payments
a) Marketable emissions permits - ERC's or cap and trade
How do incentive based systems work?
Incentive based systems work by altering the structure of pay-offs that agents face, thereby creating incentives for individuals or firms to voluntarily change their behaviour.
What is a Pigouvian tax and how do we obtain its value?
A Pigouvian tax is a tax that is set on any market activities that generate negative externalities.
To solve for the tax problem we attain the efficient level of pollution where MB=MD. The result is the value of the shadow price of pollution externality. This is the rate at which the tax (or subsidy) should be applier per unit of emissions. Once the tax is operative the polluter will maximise benefits at M*, where the post tax marginal benefits of additional pollution is zero.
Explain firms choice of total abatement with reference to their marginal abatement benefits/costs
Since the tax rate is constant, the marginal benefit of abatement for a firm is horizontal in the abscence of a tax and coincides with the z axis. Wwhen a tax is levied an incentive to abate exists in the form of a tax levied.
This means it will be profitable for firms to reduce pollution as long as the value of the marginal cost of abatement is less than the value of the tax rate per unit of pollution. The resultant value is Z* = M(x)-M*; the efficient level of abatement.
What are the similarities and differences when an emissions tax or subsidy is applied per unit of emissions?
In both cases of emissions taxes and abatement subsidies, the efficient rate applied is the same.
However the two instruments have a difference distribution effect of income. Subsidies result in a firm gaining addition revenue as a firm will only undertake abatement when the unit abatement subsidy exceeds the marginal cost of abatement where as a tax applied will result in an overall loss of income to the firm.
What effects may an abatement subsidy have over an emissions tax?
May alter industry profitability and so may change the size and structure of the industry. If the industry is englarged due to the subsidy it may have the effect of partially or wholly offsetting the short run emission reduction.
Explain the broad basis of a marketable permit system
Marketable Permit Systems work on the basis that any increase in emissions will be offset by an equivalent decrease elsewehere. There is a limit set on the total quantity of emissions but the regulator does not attempt to determine how that total allowed quanity is allocated among individual sources. This means that MPS work on quantity rather than price based systems and the prices are determined endogoenously.
The two main types of marketable permit systems are the cap and trade and emission reduction credit systems.
Detail the steps taken to the application of a cap and trade system for a uniformly mixing pollutant
1. A total quantity of emissions (or cap) is set to be allowed by actual and potential polluters over some period of time
2. The creation of a quantity of emissions permits is equal to the cap
3. A mechanism is created to initially allocate the total quantity of emission permits between potential polluters
4. A rule is set which states that no firm is allowed to emit pollution beyond the number of permits it holds
5. A system whereby actual emmisions are monitored and penalties are applied
6. A guarantee that emission permits can be freely traded between firms at whichever price is agreed to by that trade
What are the two general methods of permit allocation in a cap and trade system?
1. Regulator sells all permits by auction
Firms submit bids which the regulator uses to construct a demand curve for permits. This demand curve is equal to the aggregate marginal benefit curve. The market demand curve for permits is equal to the aggregate marginal cost of abatement curve and the equilibrium price is found from the pre determined quantity of emissions.
2. Regulator allocated permits for free (this requires a distribution rule to be chosen)
Regulator will initially distribute the permits free of charge and allow them to be freely traded on a market. Buyers will be firms with relatively high marginal abatement costs and sellers will be firms with relatively low marginal abatement costs.
In a well functioning market the determined market price will be same as in the case of a competitive auction.