Athanasios Kampas and Spyridon Mamalis *

Transcription

1 2006, Vol 7, No 2 75 Assessng the Dstrbutonal Impacts of Transferable Polluton Permts: The Case of Phosphorus Polluton Management at a Rver Basn Scale Athanasos Kampas and Spyrdon Mamals * Abstract Although the ntal allocaton of polluton permts s neutral n terms of effcency, t does have a sgnfcant mpact on dstrbutve equty. In ths paper, we examne the two man categores of permt allocaton rules, the dstrbutve and the reductve, for controllng phosphorus polluton n a small catchment n South West England. Based on the premse that the regulatory choce compromses effcency and equty, the man result of ths paper s that an allocaton of permts n proporton to the ntensty of envronmental preferences s a wn-wn choce. The reason s that t smultaneously acheves two goals. Frst, t s effcent (or cost-effectve) snce a permt system acheves a prespecfed target at a mnmum abatement cost, whle second, t s the only allocaton rule whch reduces the ncome nequalty of the baselne scenaro. Keywords: polluton permts, phosphorus, nutrent management, export coeffcent model, water qualty, dstrbutve justce, ncome nequalty, Atknson Index JEL Classfcaton: Q52, Q25, Q58 Introducton. Transferable polluton permts (TPP henceforth) seem to attract consderable attenton among OECD countres for envronmental and resource management (OECD, 2001). TPP refer to physcal restrctons n the form of rghts or oblgatons to agents and the permsson to transfer these oblgatons or rghts between agents under certan condtons specfed by an admnstratve authorty. Ths approach allows agents to choose the cost effectve means of meetng the overall constrant set by the regulatory authorty. Montgomery (1972) proves that under specfc assumptons, TPP are a cost-effectve means for achevng a pre-specfed target of envronmental qualty. These assumptons refer to perfect compettve product and permt markets, to clearly defned property and usage rghts, and to neglgble transacton costs. Furthermore, the least-cost property of such nstruments s based on the premse that emsson tradng occurs smultaneously and multlaterally, whle n most cases the realsed emsson tradng has been blateral * Athanasos Kampas*: Department of Agrcultural Economcs & Development, Agrcultural Unversty of Athens, Iera Odos 75, Athens, Greece. Emal: tkampas@aua.gr. Spyrdon Mamals: Technologcal Educatonal Insttute of Western Macedona, Department of Agrcultural Products Marketng and Qualty Control, Terma Kontopoulou st Florna. mamals@econ.auth.gr

2 76 AGRICULTURAL ECONOMICS REVIEW and sequental. The latter s often consdered as the most lkely explanaton why emsson tradng does not realse the full effcency gans n controllng polluton (Atknson and Tetenberg, 1991). In the case of agrcultural polluton, farmers can modfy the dstrbuton of pollutng rghts, ntally allocated to them, by permt tradng. The typcal prerequste for farmers to ntate permt tradng s the abatement cost heterogenety. For example, a low abatement cost farm may choose to abate more and sell some of ts permts, whle a hgh abatement cost farm may prefer to buy more permts and mantan ts emsson levels. The nteracton of farmers wllngness to sell and wllngness to buy emsson permts determnes a benchmark prce, whch s the market prce for permts. Ths prce s ndependent of the ntal allocaton of permts (OECD, 2001). The major ssue n desgnng an emsson permt system s whether permts should be auctoned or should be freely dstrbuted. There are strong arguments n favour of each dstrbuton opton. The authors advocatng aucton as the most approprate means of dstrbutng polluton permts prmarly stress the mportance of revenue recyclng usually referred to as the double dvdend hypothess. Under ths hypothess, the government revenues from permt auctons can be used to reduce pre-exstng dstortonary taxes and therefore result n effcency gans to the economy as a whole (Crampton and Kerr, 1998). In contrast, the tradtonal vew n favour of grandfatherng s that t provdes greater poltcal control over the dstrbutonal effects of polluton regulaton (Stavns, 1997) The dstrbutonal mpacts of tradable permts are qute crucal for the acceptablty of such a polcy by the agents (Dnar and Howtt, 1997). The reason s that only a permt system that allocates polluton rghts free of charge, on the bass of some allocaton rule, would guarantee that exstng frms would be no worse off than they would be under a command-and-control system mposng the same degree of control (Tetenberg, 1998). Although the possblty of usng TPP for managng water qualty at a watershed scale has been outlned before (see Tetenberg ( 2003) and Zylcz ( 2003)), there have only been lmted applcatons n the relevant lterature. Some recent exceptons are Tao et al (2000) and Kampas and Whte (2003). Ths paper brngs two nnovatons to the analyss of permt allocatons. Frst, t examnes a much broader range of permt allocaton rules whch, to our best knowledge, have not been consdered before at a rver basn scale. Some of these rules are drawn from the related lterature of greenhouse gasses control whle some others have not been appled before. The second nnovaton of ths study s that t assesses the dstrbutonal mpacts of varous permts allocaton rules not only as transfers between agents- as t s standard n the relevant lterature (Rose and Oladosu. 2002)- but also as to whether they allevate ncome nequalty. The emprcal applcaton of ths study uses the case of phosphorus (P henceforth) management at a small agrcultural catchment n North England, the Kennet. P s usually the lmtng nutrent for the formaton of algal blooms n freshwater bodes. The greatest losses of P from the sol usually occur by surface run-off and eroson (Addscott and Thomas, 2000). The rest of the paper s organsed as follows. Secton 2 presents a possble range of permt allocaton rules that could be appled for phosphorus management. Secton 3 brefly descrbes the emprcal applcaton, whle secton 4 presents the results of our analyss. Fnally, the man conclusons are drawn n secton 5.

3 2006, Vol 7, No 2 77 Possble Permt Allocaton Rules Followng Gupta and Bhandar (1999) there are two man prncples for allocatng freely emsson permts: a) the dstrbutve one, whch refers to the allocaton of rghts and b) the reductve one, whch refers to allocaton of emsson reductons. Ths secton outlnes the major representatve allocaton rules from both prncples. Although an nfntve number of possble dstrbutve rules exst, the so-called grandfatherng rules tend to predomnate (Tetenberg, 2003). Grandfatherng refers to the ntal allocaton of emsson on the bass of hstorc use. The most common grandfatherng rule s the emsson based, whch s an allocaton n proporton to the unrestrcted level of emsson released by the sectors n the base year, e. On ths bass, any sector wll ntally receve an amount of permts ae, where a e. The e total number of permts s E, where E1e e and denotes the proporton of the requred reducton n the unrestrcted level of estmated P-load at the catch- ment scale. The emsson-based allocaton s the most frequently consdered rule for dstrbutng emsson permts (see Hanley and Moffatt (1993) Rose and Stevens (1993) and Kampas and Whte (2003)). Another grandfatherng rule s the proft-based allocaton, whch s an allocaton n proporton to the hstorcal share of sector profts n the base year. On ths bass, any sector wll ntally receve E, where and s the ntal proft of the th sector. Ths allocaton method s consdered by Bohm and Larsen (1994) and by Kverndokk (1995). The thrd grandfatherng rule utlses a composte ndex for the ntal dstrbuton of emsson permts. Such a composte ndex s defned as the weghted average of the emsson shares, profts shares and land shares of the agents. On ths bass, any sector wll ntally receve E, where e b w1 w2 w3 e b, and b s the utlsed land of the th agent. Note that w 1. Such an allocaton s proposed by Rngus et al (1998), Smons (2000) and Bohrnger and Lange (2005). The fourth scheme allocates the emsson permts n proporton to the relatve preferences for envronmental qualty whch socety attaches to varous productve sectors. Such preferences are defned by socety s wllngness to pay for an mprovement n envronmental qualty. Chander and Tulkens (1992) have shown that at equlbrum the sector margnal costs of reducng ther emssons are equal to the socety s preferences for envronmental qualty towards them. Consequently, any sector wll ntally receve E amount of permts, where m and m denotng the margnal cost m of reducng the emssons of sector th.

4 78 AGRICULTURAL ECONOMICS REVIEW The ffth dstrbutve rule allocates the number of permts n proporton to the sectors ablty to pay. Under ths scheme, the permts are dstrbuted nversely to the sector s ncome. The ratonale behnd such a scheme s that the more proftable sectors should shoulder a hgher proporton of the mtgaton costs. Therefore, any sector wll 1 ntally receve E amount of permts, where. The ablty to pay scheme s consdered by Rose and Zhang (2004), Rngus et al (1998) and Rdgley (1996). The last scheme consdered n ths study belongs to the class of allocaton rules whch refer to emsson reductons. It starts wth a unform emsson reducton and then adjusts them on the bass of an Effcency Index, EI. Such ndex s defned as the emsson ntensty of a sector (P load dvded by ncome), normalsed by the total emsson ntensty, e EI. Therefore, any sector wll ntally receve e 1 EIe amount of permts. The ratonale behnd such a scheme s that sectors wth hgh emsson ntensty, EI 1, are requested to abate more compared to the reference pont of unform reducton n all sectors. Note that the resultng allocaton from such a scheme may need an approprate scale-up to exhaust the prescrbed number of emsson rghts. Gupta and Bhandar (1999) examne such a scheme. As long as the ntal allocaton of permts s resolved, then each agent maxmses the followng proft functon: max q, e p e e (1) 1 where q, e stands for the proft of the th sector, q s a vector of homogeneous products produced by the th sector. The permt prce s p 1 whch s the mputed shadow prce of the constrant e E, where e e stands for the dfference between the emsson level released by the th sector, e, and the ntal allocated permts, e. Note that such a dfference can be postve, negatve, or even zero dependng on the amount and the drecton of permt tradng. The ntal allocaton of permts drectly determnes an ncome effect, snce t nvolves a transfer of revenues between agents (drectly between the State and the agents and ndrectly between the agents). In turn, these transfers affect the ncome dstrbuton of the agents. Consequently, the regulator may opt for a specfc allocaton that satsfes addtonal polcy objectves. Such an addtonal objectve may be the allevaton of ncome nequalty. Polces such as the redstrbuton of ncome am prmarly at "socoeconomc" equty and are among the man objectves of any tax system (Breton et al, 1996). Notwthstandng the reducton of ncome nequalty s often conceved as an end n tself, the end may requre justfcaton. Arguably, such a justfcaton may be based on the premse that "soco-economc" equty plays an mportant role n sustanng the socal fabrc, whch s well acknowledged by the proponents of the welfare state (Roller, 1995). 1

5 2006, Vol 7, No 2 79 In what follows, we assume that the regulator pursues a varety of objectves, one of whch may be the allevaton of ncome nequalty. Such an objectve can be the gudng prncple wth whch the regulator can choose among varous allocaton rules. Among varous ndces of ncome nequalty we restrct our attenton to the Atknson Index, snce t s the only measure whch satsfes the Pgou-Dalton condton (Temkn, 1993) 1, and at the same tme can be nterpreted as an ndex of the potental gans from redstrbuton (Barr, 1998). The Atknson Index, A, s gven by: A I 1 n (2) where, I stands for the ncome of the th sector, s the average ncome and n s the number of sectors. The parameter 0 represents the weght attached by socety to nequalty n the ncome dstrbuton. The hgher the parameter s the hgher the senstvty attached to the transfers to the lower ncome classes. The ndex A ranges zero to 1 n 1. Accordng to Atknson (1975) the ndex A has a very natural nterpretaton beng " the proporton of the present total ncome that would be requred to acheve the same level of socal welfare as f present ncomes were equally dstrbuted " (p. 48) Ṫhe ndex A explctly ntroduces such judgements through the choce of the parameter, whch ranges from 0 meanng that socety s ndfferent about ncome dstrbuton, to, whch means that socety s concerned only wth the poston of the least advantaged members of socety. The latter case corresponds to what Rawls (1971) refers to as a contractual theory of justce, where nequalty s assessed n terms of the poston of the last advantaged members of socety. Despte the numerous advantages of the A ndex (see Temkn (1993) pp: ) the man problem attached to t s that there s no way of fully calbratng. As a result someone s restrcted to examne parametrcally a range of values n estmatng the Atknson s ndex. Note that when 1 the A ndex collapses to the Champernowne Index, C, whch s gven by C 1 M, where M 1 n n I (Yfantopoylos, 1990). 1 The Applcaton of Phosphorus Polluton Management at a Rver Basn Scale For the purposes of examnng the dstrbutonal mpacts of varous permt allocaton rules and the lkely regulatory choce we consder the hypothetcal case of emsson permts allocaton n an agrcultural catchment n South England. In that catchment, the Kennet, the regulator consders the case of a cap and trade scheme n order to acheve a 20% reducton n the P emsson level relatve to the unregulated case. The emprcal model proceeded n three stages. Frst, a Geographcal Informaton System (GIS) was used to classfy land classes based on ther sol propertes and to dentfy the total area of the catchment. Second, an export coeffcent model assessed

6 80 AGRICULTURAL ECONOMICS REVIEW the P loss possbltes. Fnally, an aggregate non-lnear programmng model smulated producers responses to the polluton control polcy. Our approach s what Hazell and Norton (1986) refer to as an aggregate regonal model, n whch the regulatory objectve s to maxmse regonal welfare. The full account of the modellng framework s gven by Kampas et al (2002). P s strongly retaned n most sols and P losses are prmarly assocated wth sedment carred n surface runoff durng heavy ranfall (Haycock and Muscutt, 1995). However, quantfcaton of losses are less well understood and advanced for P compared to ntrates (Edwards and Wthers, 1998). There s consderable uncertanty wth respect to the weghtng that can be placed upon crop/agronomc practces aganst those landscape type features that nfluence loss (such as slope and sol texture). Wthn ths paper we have taken the smplest method of predctng P loss the export coeffcent. In the form used here the export coeffcent model gnores the hghly epsodc and spatally dscrete nature of many eroson events and although these weaknesses are acknowledged t stll probably represents the most approprate assessment. Snce P losses are lkely to be lnked wth the catchment s croppng pattern and land management rather than the ntensty of the nputs used, an export coeffcent model s well suted to capture such a phenomenon. Export coeffcent models have been used extensvely n the lterature for envronmental management analyss (Jones, 1996; Worral and Burt, 1999; Heathwate, et al 2003). It s noteworthy that an export coeffcent model gves estmates of the average annual P losses of dfferent land classes gnorng ther seasonal varaton, whch may be qute mportant (McDowell and Trudgll, 2000). On the other hand, export coeffcent models are transparent and easy to mplement. An export coeffcent model can be wrtten as follows: L P n E A (3) P where L s the P loss; E s export coeffcent for nutrent source ; A s the area of the catchment occuped by land use type (or number of lvestock type ). For the purposes of our applcaton we employed Jones (1996) values for P export coeffcents. The author emprcally valdated the P export coeffcent models for two catchments n South England, whch are adjacent to our case study, and therefore t was assumed that the Kennet catchment has the same pattern of export coeffcents. The followng steps were followed to examne the lkely regulatory preference for a specfc permt allocaton rule. Frst, we ran the unrestrcted regonal model to assess the baselne economc and envronmental performance of the Kennet catchment. Then, we ran the restrcted regonal model to estmate the frst best soluton for the partcular regulatory objectve examned, that of 20% reducton n the level of P emssons. The frst best soluton s charactersed by the equmargnal prncple, meanng that under such a soluton the margnal cost of polluton control are the same for all sectors. The frst best soluton can be acheved ether through emsson taxes or through a scheme of permts tradng. Note that the prce for a unt of emsson permt s gven by the shadow prce of the relevant envronmental constrant (Hanley et al,1997). Table 1 gves the man results of the unrestrcted (baselne) and the restrcted solutons. The choce of a permt allocaton scheme s effcent neutral n the sense that the regonal welfare s not affected, gven that all allocaton schemes redstrbute the same 1

7 2006, Vol 7, No 2 81 amount of permts. By contrast, a partcular choce of a permt dstrbuton rule affects the ncome dstrbuton. Therefore, t was assumed that a socal planner may opt for a specfc allocaton rule whch acheves a secondary regulatory objectve such as the reducng ncome nequalty. To ths end, the Atknson ndex was estmated for the range of allocaton rules examned n ths study. The next secton dscusses the results derved from our regonal model decomposed nto the nvolved agrcultural sectors, namely the arable and the lvestock farmng systems. The focus of permt tradng between productve sectors s typcal practse n the relevant lterature (see (Harrson and Radov, 2002) ), whch s drectly analogous to what Computable General Equlbrum (CGE) models do, n the sense that the results are often decomposed nto countres or block of countres. Table 1. Farm Adjustment and Land Use Changes nduced by Polluton Control. ( % stands for change) Baselne Soluton Restrcted Soluton % Land Use (000 s ha) Arable Permanent Grassland Temporary Grassland Rough Grazng Total Grassland Set-asde Total Land Lvestock Grazng Unts (000 s GLU) Cattle Sheep Total Phosphorus Load (tons) Arable Lvestock Total Profts (000 s ) Arable Lvestock Total Results and Dscusson The regulator objectve of a 20% reducton n the estmated emsson level at a catchment scale s equvalent to ssung domestc transferable permts equal to the 80% of the unrestrcted soluton. The varous permt allocaton rules proposed by the regulator have dstnct mpact on agents profts as predcted from equaton (1). Table 2 shows the dfferent permt allocaton schemes used n ths study and the resultng emssons permts held by the agrcultural sectors n the regon. From Table 2 t s possble to characterse the varous allocaton rules on the bass of sectors preferences. The arable sector, for example, prefers the allocaton whch s pro-

8 82 AGRICULTURAL ECONOMICS REVIEW portonal to the ntensty of envronmental preferences, followed by the grandfatherng rule on the bass of the P-load shares. In partcular, the arable sector s allocated more permts under the rule whch s proportonal to the ntensty of envronmental preferences snce t s found to have a substantal hgher margnal abatement costs than lvestock. In addton, the second-best preference for the arable sector s the grandfatherng rule on the bass of hstorc emssons gven that t has a szeable contrbuton to the overall P-load. All the rest of the allocaton methods favour the lvestock sector, snce lvestock s less pollutng and more proftable n comparson to the arable sector. Table 2. Permts allocaton nduced by varous permt allocaton rules (tons of P) Permt Allocaton Rules Arable Lvestock Permts % Permts % 1. Grandfatherng 1.1. Proportonal to the baselne P-load share Proportonal to the baselne ncome share Proportonal to a compromse ndex Proportonal to the ntensty of envronmental preferences Proportonal to the ablty to pay Proportonal to an effcency ndex Frst Best Soluton Gven that the ntal dstrbuton has an ncome effect, t follows that the mpact of varous permt allocaton methods on sectors proftablty should be examned. Ths s presented n the followng Table. Table 3. Income by Sector resultng from varous permt allocaton rules (000 s of ) Permt Allocaton Rules Arable Lvestock Permts % Permts % 1. Grandfatherng 1.1. Proportonal to the baselne P-load share Proportonal to the baselne ncome share Proportonal to a compromse ndex Proportonal to the ntensty of envronmental preferences Proportonal to the ablty to pay Proportonal to an effcency ndex Frst Best Soluton It s clear that the pattern of ncome effects follows drectly the pattern of the ntal dstrbuton of emsson permts. In partcular, the arable sector has a strong preference for the allocaton whch s proportonal to the ntensty of envronmental preferences because such an allocaton brngs about a % ncrease n the sector s ncome compared to the frst best soluton. By contrast, the lvestock sector prefers an allocaton of permts n proporton to the ncome shares snce under such a scheme the sector s ncome s % hgher than the reference one. Table 4 presents the estmated nequalty ndces for the lkely allocaton rules.

9 2006, Vol 7, No 2 83 Accordng to Atknson (1975) there are two ways of nterpretng the A ndex. For example, the value A n Table 4, regardng the baselne scenaro under the assumpton that 0.5, means that we could reach the same level of socal welfare, f ncomes were equally dstrbuted, wth only % ( =0.9992) of the present total ncome. Alternatvely, the gan from redstrbuton to brng about equalty would be equvalent to rasng total ncome by per cent. Admttedly, ncome nequalty s not much of a problem for our case study snce the estmated A ndces n Table 4 reflect a rather equal dstrbuton of ncome between the agents n the regonal economy. In addton, as t was expected, the magntude of the reducton n ncome nequalty s condtonal to the choce of the Atknson Index,. In partcular, the hgher the socal averson towards nequalty s the hgher the welfare gans from redstrbuton. Table 4. The Atknson Index under varous permt allocaton rules Permt Allocaton Rules Atknson Index 0.5 % 1 % 3 % 1. Grandfatherng 1.1. Proportonal to the baselne P-load share Proportonal to the baselne ncome share Proportonal to a compromse ndex Proportonal to the ntensty of envronmental preferences Proportonal to the ablty to pay Proportonal to an effcency ndex Frst Best Soluton Baselne Scenaro (unrestrcted) Arguably, what really matters s the relatve rankng of the lkely allocatons rules n terms of ther mpact on ncome nequalty, so there are a few ponts that do deserve attenton. Frst, the most nterestng result s that the only permt allocaton method whch allevates ncome nequalty s the one whch s proportonal to the ntensty of envronmental preferences. Note that the reference pont for such a comparson s the unrestrcted soluton. All the other rules ncrease ncome nequalty. Second, the frst best soluton acheved by permts tradng represents a soluton whch ncreases ncome nequalty. Thrd, the most known method of allocatng emsson permts, that of grandfatherng on the bass of baselne emssons only margnally worsens ncome nequalty. To recaptulate, the permt allocaton method whch s proportonal to the ntensty of envronmental preferences s among the rare stuatons termed wn-wn solutons snce t acheves two goals smultaneously. The frst goal refers to effcency (or costeffectveness) snce a permt system acheves pre-specfed targets at a mnmum abatement cost, whle the second refers to equalty snce the allocaton rule on the bass of envronmental preferences reduces the ncome nequalty of the baselne scenaro. Conclusons In ths paper we have examned a range of permt allocaton schemes for the case of phosphorus management n a small catchment n South England. Although the choce of an allocaton rule s neutral n terms of effcency t has an ncome effect. Assumng that

10 84 AGRICULTURAL ECONOMICS REVIEW n most cases the regulator seeks a number of objectves, one of whch may be the reducton of ncome nequalty, the choce of a permt allocaton scheme comes naturally as the one that acheves the lower ncome nequalty. On the bass of ths paper s smulated results we have found that the allocaton whch s proportonal to the ntensty of envronmental preferences reduces the ntal ncome nequalty between the agrcultural sectors n the regon n queston. Fnally, t should be stressed that although such a result may be condtonal to the prevalng stuatons at the partcular regon n queston (ste specfc), the dentfed opton of a wn-wn polcy outcome s very promsng and needs to be confrmed by smlar studes before t s establshed as such. Note 1 The Pgou-Dalton condton says that, other thngs equal, transfers from rch to poor decrease nequalty and vce versa (quoted by Sen (1976) p.27) References Addscott, T., and Thomas, D. (2000) Tllage, mneralzaton and leachng: phosphate. Sol & Tllage Research. 53: Atknson, A. (1975). The Economcs of Inequalty. Oxford: Clarendon Press. Atknson, S., and Tetenberg, T. (1991). Market falure n ncentve-based regulaton: the case of emsson tradng. Journal of Envronmental Economcs and Management. 21(1): Barr, N. (1998). The Economcs of the Welfare State. Oxford: Oxford Unversty Press. Bohm, P., and Larsen, B. (1994). Farness n a Tradeable-Permt Treaty for Carbon Emssons Reductons n Europe and the former Sovet Unon. Envronmental and Resource Economcs. 4: Bohrnger, C., and Lange, A. (2005). On the desgn of optmal grandfatherng schemes for emssons allowances. European Economc Revew, 49, Breton M, Moyes P, and Trannoy A. (1996). Inequalty Reducng propertes of Composte Taxaton. Journal of Economc Theory. 69, Chander, P., and Tulkens, H. (1992). Theoretcal foundatons of negotatons and cost sharng n transfronter polluton problems. European Economc Revew. 36: Crampton, P., and Kerr, S. (1998). Tradable Carbon permt Allocaton: How and Why to Aucton not Grandfather Washngton, DC.: Resource for the Future. Dnar, A., and Howtt, R. (1997). Mechansms foe Allocaton of Envronmental Control Cost: Emprcal Tests of Acceptablty and Stablty. Journal of Envronmental Management. 49: Edwards, A., and Wthers, P. (1998). Sol phosphorus management and water qualty: a UK perspectve. Sol Use and Management. 14: Gupta, S., and Bhandar, P. (1999). An effectve allocaton crteron for CO2 emssons. Energy Journal. 27: Hanley, N., and Moffatt, I. (1993). Effcency and dstrbutonal aspects of market mechansms n the control of polluton: An emprcal analyss. Scottsh Journal of Poltcal Economy. 40(1):

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