Lecture 4a Environmental regulation

Transcription

1 Lecture 4a Environmental regulation Environmental Economics, Politecnico di Milano, Academic Year Giovanni Marin IRCrES-CNR, Milano Giovanni Marin Environmental Economics - Lecture 4a 1 / 13

2 Book paragraphs for this lecture: 6.1, 6.2, , Giovanni Marin Environmental Economics - Lecture 4a 2 / 13

3 Solutions to externalities ˆ Private solutions ˆ Assignment of property rights and bargaining (Coase theorem) ˆ Public solutions ˆ Direct regulation (command and control) ˆ Market-based instruments ˆ Pigouvian taxes ˆ Pollution permits ˆ Subsidies Giovanni Marin Environmental Economics - Lecture 4a 3 / 13

4 Regulation ˆ Government intervention is needed when markets fail (but also government intervention may fail...) ˆ Environmental regulation: 1. How to set socially optimal environmental targets (e.g. level of pollution flows or stocks) political decision, potentially also based on the criterion of economic efficiency 2. Once the target is set, governments should identify the best way to reach it (even in the case the target was not set following pure economic efficiency criteria) ˆ Economic theory contributes to both phases Giovanni Marin Environmental Economics - Lecture 4a 4 / 13

5 Criteria for selecting pollution control instruments Criterion Cost-effectiveness Long-run effects Dynamic efficiency Ancillary benefits Equity Dependability Flexibility Costs of use under uncertainty Information requirements Brief description Does the instrument attain the target at least cost? Does the influence of the instrument strengthen, weaken or remain constant over time? Does the instrument create continual incentives to improve products or production processes in pollution-reducing ways? Does the use of the instrument allow for a double dividend to be achieved? What implications does the use of an instrument have for the distribution of income or wealth? To what extent can the instrument be relied upon to achieve the target? Is the instrument capable of being adapted quickly and cheaply as new information arises, as conditions change, or as targets are altered? How large are the efficiency losses when the instrument is used with incorrect information? How much information does the instrument require that the control authority possess, and what are the costs of acquiring it? Giovanni Marin Environmental Economics - Lecture 4a 5 / 13

6 Command and control instruments ˆ The dominant method for reducing pollution in most countries has been the use of direct control over polluters ˆ Definition of standards, obligations and prohibitions ˆ This set of controls is commonly known as command and control instruments ˆ Command and control instruments can be designed to intervene at any stage of production/consumption ˆ Regulations may apply to emissions themselves, to the quantity of final production, to the production techniques that are employed, or to the level and/or mix of productive inputs ˆ It can consist on the ban of an input, the obligation to use a certain technology, the obligation to move locate certain productive activities in a certain area, etc Giovanni Marin Environmental Economics - Lecture 4a 6 / 13

7 Non-transferable emissions licences ˆ Suppose that the government is committed to attain some overall emissions target for a particular pollutant ˆ The government thus creates licences (also known as permits or quotas) for that total allowable quantity ˆ After adopting some criterion for apportioning licences among the individual sources, the licences are distributed to sources of emissions (e.g. factories) ˆ These licences are non-transferable the licences cannot be transferred (exchanged) between firms ˆ Each firm s initial allocation of pollution licences sets the maximum amount of emissions that it is allowed Giovanni Marin Environmental Economics - Lecture 4a 7 / 13

8 Non-transferable emissions licences ˆ The environmental target can be attained by licence schemes only if polluters believe their action are observed/monitored or if the penalties on polluters that pollute beyond the licence are high relative to the cost of abatement ˆ Licence schemes have to be supported by costly monitoring systems and by sufficiently high penalties for non-compliance ˆ In presence of information asymmetries (marginal costs of each factory is observable only by the factory itself and not by the government), non-transferable emissions licences will not be cost efficient ˆ Main issue: how to distribute licences to factories? ˆ No continuous price on pollution price is zero up to the point in which the amount of licensed emissions is reached, then becomes very large (and sometimes not even linked to the level of excess pollution) beyond this point little/no incentive to over-abate emissions Giovanni Marin Environmental Economics - Lecture 4a 8 / 13

9 Example: uniform distribution of licences to all factories Factory-specific licence Overall cap => N*Licence Marg abatement cost of A Marg abatement cost of B Licence for each factory Abatement= M MAX -M Giovanni Marin Environmental Economics - Lecture 4a 9 / 13

10 Minimum technology requirements ˆ Command and control regulations that specify mandatory requirements for production processes or specific equipment to be adopted ˆ Minimum technology requirements are imposed upon potential polluters ˆ Examples ˆ Best practicable means (BPM) ˆ Best available technology (BAT) ˆ Best available technology not entailing excessive cost (BATNEEC) ˆ Catalytic converters for cars ˆ Ban of incandescent light bulbs ˆ In some variants of this approach, specific techniques are mandated, such as the use of fuel-gas desulphurisation equipment in power generation or minimum stack heights Giovanni Marin Environmental Economics - Lecture 4a 10 / 13

11 Cost-effectiveness of minimum technology requirements ˆ Minimum technology requirements do not focus on the abatement effort of polluters ˆ They restrict the choice set allowed to firms to reduce emissions ˆ Decisions about emissions reduction are centralized when they might be better left to the firms ˆ Firms would choose the least costly method of reducing emissions rather than being forced to use a specific technological solution (remember the abatement cost curve for CO2) Giovanni Marin Environmental Economics - Lecture 4a 11 / 13

12 Location choices ˆ Pollution control objectives could be met by separating the location of people and pollution sources ˆ This is only relevant where the effects of pollution generate local damages (e.g. ozone precursors, while GHGs only entail a global uniform damage) ˆ Separation can occur ex ante or ex post ˆ Ex ante zoning or planning control ˆ Ex post think about displacing people from contaminated areas (e.g. Chernobyl) ˆ Location decisions of this kind will not be appropriate when we are also concerned about the impact of pollution on ecosystem services and not only about impacts on human health Giovanni Marin Environmental Economics - Lecture 4a 12 / 13

13 Command and control: assessment ˆ Attractive properties of command and control instruments ˆ Certainty of outcome ˆ Ability to get desired results very quickly ˆ Little information is needed ˆ Unattractive properties of command and control instruments ˆ Likely to be cost-inefficient ˆ They do not contain any mechanism that induce: ˆ Equalization of marginal abatement costs across emitting sources ˆ Equalization of marginal abatement costs across different programmes (e.g. SO2 vs NOx abatement) ˆ Lack of dynamic incentives no premium for over-abatement Giovanni Marin Environmental Economics - Lecture 4a 13 / 13