Lecture # 6 -- Command and Control/Taxes and Subsidies

Transcription

1 Lecture # 6 -- Cmmand and Cntrl/Taxes and Subsidies I. Ecnmic Analysis f Standards Incentives matter, as what is regulated affects behavir US gasline cntent regulatins address VOCs and NOX that lead t zne Auffhammer/Kellgg (AER 2011) study the effect f US gasline cntent regulatins, which differ acrss states Federal rules limit ttal evapratin f VOCs frm gasline (called Reid Vapr Pressure regulatins, r RVP) New rules intrduced in 1989, take full effect in 1991 Mre stringent in summertime Vary acrss regin, frm allwing 9.0 psi evapratin t 7.8 psi in nn-attainment areas. Sme lcalities even chse a mre stringent 7.0 psi limit. They dn t cnsider hw much impact each VOC has n zne Severe nn-attainment areas must use refrmulated gasline (RFG), which has stricter limits n benzene and requires at least 2% xygen frm an additive such as MTBE r ethanl Other areas may pt t use RFG as part f their plans t reach attainment Califrnia state regulatins place strict limits n the specific VOCs fund mst imprtant fr frming zne Research strategy Use regressin analysis t cmpare zne cncentratins in areas treated with ne f the regulatins abve t unregulated cntrl regins Regressin cntrls fr ther factrs, such as weather, that affect zne General federal rules (labeled RVP in Figure 5a that I shwed in class) range frm 9.0 psi t 7.8 psi r lwer. The 9.0 cunties serve as a baseline. Fcus n June-August, because zne peaks then and that is when seasnal regulatins are in effect. Results Mre stringent RVP rules had almst n effect. Nte in figure 5a that the RVP cunties and baseline cunties have very similar trends RFG rules in 1995 led t mdest reductins in zne (Figure 5b) Mre stringent Califrnia rules had a larger effect (Figure 5c) Ozne cncentratins fell by abut 16%

2 Why the difference? The federal standards are mre flexible. They dn t target specific VOCs. Thus, firms fcus thse that are easiest t reduce (primarily butane). This lwers cmpliance csts (just cents/galln) but has less envirnmental benefit. Butane is nt highly reactive in frming zne. The Califrnia standard fcuses specifically n cmpunds knwn t be mst prblematic fr zne (lefins & armatic hydrcarbns that are 3-10 times mre reactive than butanes) Cmpliance cst is higher (8-11 cents per galln), but has larger envirnmental impact Shuld standards be applied unifrmly? Federal standards apply thrughut the U.S. Is it apprpriate t have unifrm standards acrss regins? Are the needs f rural and urban areas similar? If marginal damages differ acrss regins, a unifrm standard cannt be efficient in bth jurisdictins. Hwever, having different standards increases csts t the gvernment. Nte in this case the issue is variatin in the marginal damage functin. Shuld standards be the same acrss firms? Efficiency is achieved when MAC is equal acrss firms, which wn t happen with unifrm standards unless the MAC curves are the same. By efficiency, we mean that any given abatement level is achieved at the lwest cst pssible. Nte that MAC may even vary acrss regins, as in the example f arsenic in drinking water. Vintage differentiated regulatin can help address differences in MAC frm cmmand and cntrl. Hwever, it raises additinal issues, particularly with dynamic investment decisins. With vintage differentiated regulatin (VDR), standards depend n the entry date f each unit. Newer units face mre restrictive regulatins. Older units are ften exempt ( grandfathering ) Examples Clean Air Act New Surce Review Emissins standards fr autmbiles Clean Water Act effluent limits fr water treatment plants

3 Why use VDR? Efficiency Csts are lwer fr newer units Relates t equimarginal principle Hlding all plants t the same standard is nt cst effective In principle, CAC culd mimic an efficient standard if each plant s regulatins varied depending n MAC. Hwever, this is hard t bserve. If MAC crrelates with vintage, using vintage (which is easily bserved) t differentiate regulatins makes CAC mre efficient. Equity Rules aren't changed in midstream Plitics Easier t pass regulatins if dn't harm existing firms Ptential fr ecnmic rent fr existing firms if VDR makes entry int the market harder. Effect n investment Firms invest if NPV f benefits (net f O&M csts) > cst f investment VDR makes investment mre cstly Bth initial csts and O&M csts higher As a result, investment falls, and capital is kept lnger In extreme cases, VDR culd lead t mre emissins in the shrt run, as lder, less efficient equipment is kept lnger than befre. Nte that market structure matters The effects will be largest in cmpetitive markets. Plants facing rate f return regulatin find it easier t pass csts n t custmers. Fr example, studying the effect f NOX trading markets, Fwlie (2007) finds that plants in deregulated markets are less likely t invest in capital intensive equipment.

4 Evidence: Autmbiles VDR fr autmbiles: Emissin standards Safety standards Fuel ecnmy regulatins Nte that retrfitting lder vehicles wuld be very expensive and hard t enfrce. Thus VDR makes sense fr autmbiles. Evidence frm 1981 emissins standards increase Using price elasticities and estimates f cst increases frm new emissin standards, Gruenspecht fund that VDR led t a 2-4% decrease in sales in the first 5 years after new standards Effect n emissins CO emissins up 1%/year fr first 4 years HC emissins up 2%/year fr first 5 years NOX emissins fell immediately Nte that, by 1990, CO emissins dwn 5.3%, and HC emissins dwn 16% Alternatives: Pay peple t scrap ld vehicles. Greunspecht suggests a $250 bunty fr scrapping cars mre than 15 years ld. Gas taxes instead f fuel ecnmy standards Evidence: New Surce Review New Surce Review (NSR) is part f the Clean Air Act Regulatins apply nly t new surces Hwever, existing surces that make majr mdificatins must als cmply. Several studies find that NSR lwers investment, thus extending the life f pwer plants. NSR can als raise the cst f perating newer plants. As a result, newer plants may be idled first. Stantn (1993) fund that plants with weaker regulatins were used mre intensely. NSR can discurage investment at lder plants. Hwever, Wlfram and Bushnell (2012) find that this effect is small. They find that NSR reduces capital expenditures at existing plants, but they find n change in perating csts, fuel efficiency, r emissins.

5 II. Piguvian Taxatin and Subsidies Piguvian tax A tax levied n each unit f a plluter s utput in an amunt equal t the marginal damage that it inflicts at the efficient level f prductin. The gal is t set the tax s that the plluter incrprates the scial cst. Nte that Piguvian taxatin is a secnd-best slutin, as we ve taxed the utput. It wuld be better t tax the pllutin directly. Mdern ecnmic slutins t pllutin, which we will discuss later, take this int accunt. It is a secnd-best slutin because, althugh the level f utput is crrect fr the technlgy being used, the firm desn t have the crrect incentives t use the apprpriate technlgy (e.g. pllutin cntrl, mre efficient machines, etc.) because there is n price placed n pllutin. Hwever, there may be times when this is the best we can d. Fr example, we cannt measure the actual emissins frm cars, s we instead tax gasline cnsumptin, since pllutin is a byprduct f gasline cnsumptin. The Piguvian tax wrks by internalizing the cst f the externality. We can d the same thing with a subsidy. In this case, the pprtunity cst f plluting is lsing the subsidy. Types f subsidies: An abatement equipment subsidy wuld pay a firm fr adpting a specific abatement technlgy. A per unit subsidy pays a firm fr each unit f pllutin reduced belw sme predetermined level. Prblems with subsidies Firms may enter market, s that ttal pllutin increases Need t raise taxes t pay fr subsidies Subsidies are ften plitically mtivated, and can be difficult t remve when n lnger needed.

6 Very different distributinal effects The plluter receives mney frm the gvernment, rather than paying Benefits ften g t higher incme husehlds, as they are mre likely t invest in new equipment (e.g. hybrid vehicle, slar panels) Surce: NBER Digest, September 2015

7 Payments typically mre than necessary t induce adptin f the technlgy In the graph abve, MPB represents the marginal private benefits f slar panels, and MSB the marginal scial benefits. Withut a subsidy, cnsumers cmpare MPB t marginal cst and chse QP. The ptimal level is Q*. A subsidy equal t the difference between MSB and MPB will induce the crrect quantity f slar panels. Hwever, much f the mney spend des nt directly change behavir. Area A represents payments t peple wh wuld have purchased slar panels even withut the subsidy Area B is a payment t new adpters abve and beynd the minimum necessary t get them t buy the slar panels (since their MPB is higher than the MC + subsidy) Only area C is required t get these extra adpters t chse Q*.

8 III. Emissin Fees Recall that the prblem with externalities is that they are nt reflected in prices. The gvernment can rectify the prblem by setting a price fr pllutin. The gal is t set the fee s that the plluter incrprates the scial cst. If MAC is knwn, simply set the fee equal t MAC at the ptimal level f pllutin. The firm will find it beneficial t abate up t this pint, since abating is cheaper than paying the fee. After this pint, paying the tax is cheaper than abatement, s n further abatement ccurs. Nte that since MAC = MD at the ptimal level, the firm is taking int accunt the value f the damage it is ding. If MAC is unknwn, the fee shuld be based n the expected value (the best guess f MAC).