Lecture 5
ARE 336
Comparison of CAC and IB
environmental policies
Outline
• Policy Instruments
– Command and Control
– Incentive Based
•
•
•
•
•
Types of Standards
Marginal Cost of Abatement
Marginal Benefit of Abatement
Marginal Cost of Enforcement
Allocative Efficiency and Standards
Command and Control – regulations prescribe
how emission reduction takes place
• ambient standard – designate quality level of some
substance in environment
• technology standard – stipulate the type of equipment
to be used by all regulated sources
• performance standard – emission or pollution limit
but no specification of how it is to be realized
Examples
Ambient Standard
Primary Natural Ambient Air
Quality Standards for
Criteria Pollutions
Cleanup standard for
Superfund sites
Technology Standard
Catalytic reactors for cars;
scrubbers for power
plants; CAFO/Smithfield
Agreement
Performance Standard
Bubble Policy - combining
sources at a single location
National Ambient Standards for
Criteria Air Pollutants
Cafo Regulations and Cost Estimates
$
MAC1
ΣMACi
A
Marginal Cost of Abatement = incremental costs of controlling emissions
$
MSB
Abatement
Marginal social benefit – marginal improvement in health, safety, environment with
increased abatement – also reduction in marginal damages caused by pollution
Review of Concept of Marginal
Benefits of Abatement
• D = Damages due to emissions
• ∆D/∆Q = Marginal damage with change of ambient
quality
• ∆E/∆A = Change in emissions with abatement effort
• ∆Q/∆E = Change in ambient quality with change in
emissions
So
• ∆D/∆A = - (∆D/∆Q) • (∆Q/∆E ) • (∆E/∆A)
people
environmental
media
control
technology
Other Costs of Pollution Control
• Monitoring – must monitor concentrations
to evaluate effects of compliance and in
some cases to judge confluence
• Enforcement – inspections and compliance
Issues –
• Allocative Efficiency
• Non-uniformity of Conditions and Pollutants
• Uniformity of Standards – what is “peer group”
• Multiple Polluters and Standards
School District 102
90.0000
80.0000
70.0000
ozone
60.0000
ba90_102
ba00_102
ba10_102
ct00_102
ct10_102
50.0000
40.0000
30.0000
20.0000
10.0000
0.0000
ave. deciles
School District 52
140.0000
120.0000
100.0000
ba90_52
80.0000
ozone
ba00_52
ba10_52
ct00_52
ct10_52
60.0000
40.0000
20.0000
0.0000
ave deciles
School District 75
120.0000
100.0000
ozone
80.0000
ba90_75
ba00_75
ba10_75
ct00_75
ct10_75
60.0000
40.0000
20.0000
0.0000
ave deciles
School District 89
60.0000
50.0000
ozone
40.0000
ba90_89
ba00_89
ba10_89
ct00_89
ct10_89
30.0000
20.0000
10.0000
0.0000
ave. deciles
Inefficiency of Standards
• Consider two sources with total abatement costs of C1(A1)
and C2(A2)
• Require Ā of each; no reason to believe
C1 ( A ) − C1 ( A1 ) C 2 ( A ) − C 2 ( A2 )
≠
A − A1
A − A2
or in terms of small changes
∆C1 ( A ) ∆C 2 ( A )
=
∆A1
∆A2
• Equi-marginal principle minimizes sum of two costs in
realizing given standards
Morrall’s examples of the costs of different
standards –cost per risk reduction estimated to be
provided by the regulations involved
More of Morrall’s examples
Incentive-Based Regulations
• Creates incentives to reduce cost of pollution control
• Alternative Market Instrument
Charges
Type
Example
Effluent charge or
Emission charge (fee for emission)
Sewage fees per gallon of
water
Product charge (fee for product)
Federal tax on gasoline (?)
User charge (fee for user)
Garbage fees; capacity charge
for sewer systems
Administrative charge
Motor vehicle
inspections for pollution
Type
Subsidies
Payment or tax concession
for pollution reductions
Example
Tax incentives for hybrids
Deposit Refund
Up front fee for product to
encourage proper disposal
(i.e. get fee back)
Bottle deposits
Pollution “Rights”
Allowances – permits to pollute
Credits – tradable certificates
For reductions below specified
limit
Sulfur Dioxide
program
Why Are Incentive Based
Regulations Lower in Cost ?
• Consider equi-marginal principle-goal and how
responsibility is “allocated for meeting it
• Important to consider cost of what –emissions
reductions or quality improvement
• Incentive based instruments we consider:
–
–
–
–
Effluent charges (sometimes called Pigouvian taxes)
Subsidies
Deposit refund
Tradeable permits
MAC1
MAC2
MAC2
MAC1
Least
cost
point
Control for 1
Control for 2
TAC = TAC1 ( A1 ) + TAC 2 ( A1 ) + λ[ A − A1 − A2 ]
∆TAC1
=λ
∆A1
∆TAC 2
=λ
∆A2
∴
∆TAC1 ∆TAC 2
=
∆A1
∆A2
•How does an effluent charge work?
MAC
$
OKJ = total abatement
costs
L
K
Pigouvian
tax
0
N
J
AST
0
Abatement
Emissions
Tax if AST not abated is JKNAST
MAC =
Marginal
Abatement Cost
Comparison of Standards and Tax Incentives
Tax – Abate or pay; abate up to where MAC = effluent fee (or
Pigouvian tax); then pay
Standard – Abate to standard
Cost Comparison
Instrument
Standard
Tax
Cost
OLN AST
OKJ + JKNAST
Recognize difference in incentives
Abatement/Emissions
OAST
OAST
Emission Charge versus a Product
Charge (Pigouvian tax)
How much pollution is associated with each product?
Products can cause multiple emissions; one
charge does not differentiate “reasons”.
MSC
$
MPC + charge
MPC
S1
S0
A
B
MSB
Q*
MSB = Marginal Social Benefit of Q
MPC = Marginal Private Cost of Q
MSC = Marginal Social Cost
AB = effluent charge translated to
product specific unit costs
(NYSERDA example)
Output generating pollution
Incentives for Technological Change
MAC0
$
MAC*
0
a
b
J
J*
0
Abatement
Emissions
Two Polluters with an Effluent
Charge or tax
MAC1
MAC2
E
Tax
B
D
Firm One Origin
AST
AST
Tax induces each to control to where MAC = tax
so MAC is equalized
Firm Two Origin
Subsidy
$
MSC
R
P1
Subsidy (RT)
P0
T
MPB + Subsidy = MSB (?)
MPB
Issues
Q0
Q1
Equipment subsidized
(hybrid cars)
– Entry and Exit firms in industry ( hybrids and new car buyers?)
– Measuring MSB – marginal social benefits (NYSERDA – environmental costing)
Deposit Refund Systems
Key issue – disposal of materials (chewing gum and a
deposit/refund system)
MSCIW
MPCIW + Deposit
MPCIW
a
b
MPBIW = MSBIW
QN
QIW
100%
Improper Disposal
Proper Disposal
Pollution Permit Trading
• Fixed number of permits in region
• Rules for trading
• Firms must hold permits on control
TAC (A) = total abatement cost function
MAC (A) = marginal abatement cost
E0 = emissions in absence of abatement
E = E0 – A = emissions with abatement
Recent Results for the EPA SO2
Market
Who did the purchasing –short term ?
Longer term purchases
Equi-marginal principle
• Control to point where
MAC = tax (effluent tax)
= price of permit (permit trading)
• So demand for permits based on MAC – how to see this
P = MAC (A)
E = # permits = T
T = E0 – A
• Amount of A determined by p
A = MAC-1 (p)
T = E0 – MAC-1 (p)
Instruments and Practice
• Assumption: Abatement = Emissions =
Environmental Quality
• Standards: Equal treatment of Equals
• Form of Standard: How does it affect
environmental quality
• Rules: SO2 Trading System
An example comparing how realities
of IB versus CAC can work
When spatial differences matter –what is
marginal benefit and marginal cost?
Comparison by ambient standard
Spatial differences in outcomes
One way to summarize –can you
think of others ?