TOPIC 6 : INCENTIVE BASED
STRATEGIES
Emission Charges
Learning Objectives
After this topic
• You should have an understanding of the economic and
social impact of the application of emission charges
• You should be able to evaluate the benefits and costs of
emission charges and compare these with other methods
of pollution control
Plastic Bag Tax
•http://www.youtube.com/watch?v=zhUspLMS0MM&NR=1
Incentive Based Strategies
Two Types
1. Charges and Subsidies
2. Transferable Discharge Permits
Emission Charges
“ You may discharge any amount of residuals you wish, but
your emissions will be measured and you will be required
to pay a certain charge for every unit of effluent you
discharge”
Emission Charges and Competition
• Firms will reduce emissions until marginal abatement
costs are equal to the charge on emissions (the tax)
•Assumes competitive environment
•Standards are less costly than emission charges or taxes
At what level should the charges be set?
•In competitive environments, higher charges will bring
about greater reductions in emissions
•If we know the marginal damages associated with the
pollutant, then fix the tax to produce the socially efficient
level of pollution (MD =MAC)
•See fig 1
Setting the Emission Charge
Fig 1
€
MD
MAC
t*
c
a
d
f
e
b
0
e1 e*
Emissions (tons/year)
e0
At t*, MD =MAC and
emissions are e*
Cost of total emission
control = total abatement
costs and total tax
payments
What are total abatement
costs?
What are the total tax
payments
What is the social cost of
policy?
Setting the Emission Charge
•Fig 1
•By how much has damage
€
MD
MAC
t*
c
a
d
f
e
b
0
e1 e*
Emissions (tons/year)
e0
been reduced?
•What are the remaining
damages?
•Tax take exceeds
remaining damages
•Flat tax
•Two part emission charge
Emission Charges: Unknown Marginal
Damages
•If marginal damages are unknown, then finding the
efficient tax rate is more difficult
•Emissions and Ambient Quality
•Successive Approximation Process
Emission Charges and Cost Effectiveness
•Emission Charges are cost effective
•If the same rate of tax is applied to different sources with
different MAC and each source reduces its emissions to the
point where the MAC = tax rate then MACs will be
automatically equalised across sources
•Emissions charges will lead to larger proportionate
emission reductions from firms with lower abatement costs
•Satisfies the Equi-Marginal Principle
Emission Taxes and Non-Uniform Emissions
•Not all sources have the same marginal damage functions
(as was previously assumed)
•If marginal damages vary, then a single emission charge
may not be efficient
•Zoned Emission Charge
•Within each zone the government charges the same
emission tax, however, the rate of emission tax can vary
between zones
Non-Uniform Emissions
Zoned Emission Taxes
Emission Charges and Tax
•It is uncertain by how much a tax will reduce emissions
•The effectiveness of the policy will depend on the slope of
MAC’s
•These may be unknown
•Tax revenue will also vary according to the slope of the
MACs
•http://bigthink.com/think-tank/the-carbon-tax-is-it-time-tofollow-australias-lead
Tax Revenue and Slope of MAC
€ •Steep
MAC
ۥFlat
MAC
MAC1
MAC2
th
a
d
tl
b
c
e1 e2
Emissions (ibs per month)
f
e
e3
e4
Emissions (ibs per month
Emission taxes
•How does emission reductions vary with the elasticity of
MAC curves?
•How does tax revenue vary with the elasticity of the MAC
curves?
•What are the implications for gov. policy?
Emission Charges and Innovation
•Emission charges provide strong incentives to innovate
•Their potential cost savings from new innovative pollution
control techniques are larger than under emission
standards
•Why is this the case?
Emission Charges and Innovation
•Effluent charge of t with initial
•Incentive to innovate
€
technology MAC2
•What are the costs to the firm?
•What would the cost be if e1 was
an emission standard?
•If firms introduced new
technology (MAC2)
•What are the costs to the firm?
•Implications?
MAC1
MAC2
t
c
d
a
b
e
0
e2
e1
ē
Emissions (tons/year)
Emission Charges and Enforcement Costs
•Much more difficult to enforce
•Tax bill to firms
•Identify Source
•Measurability is a key issue
•Requires permanent monitoring equipment
•Monitoring requirements are much more stringent than
those required by standards
Distributional Impacts of Emission Charges
•
Two impacts
1. Impacts on prices and output of goods and services



Firms
Consumers
workers
2. Effects stemming from the expenditure of tax funds
Reading:
http://www.naturvardsverket.se/Documents/publikationer/62
0-8245-0.pdf
Summary
•Emission charges put a price on pollution
•Prime advantage = efficiency aspects
•Also provide strong incentive to innovate
•Provide a source of tax revenue
•Difficult to determine the impact of the tax on emission
reductions and revenue
•Difficult to monitor