Economics of Pollution Environmental Policy Instruments

Transcription

1 Economics of Natural Resources and the Environment Sustainable Energy Systems PhD Economics of Pollution Environmental Policy Instruments Ana Rita Neves André Baptista Pedro Silva Porto, 12 December 2007

2 ECONOMICS OF POLLUTION In a competitive economy, decisions are made in such a way as to maximize private net product but not necessarily social net product. Arthur Cecil Pigou,

3 ECONOMICS OF POLLUTION (cont.) PROPERTY RIGTHS Characteristics of an efficient economic market: Exclusivity All benefits and additional costs as a result of the owning and using the resource should be accrue to the owner, and only to the owner; Transferability All the property rights should be transferable from one owner to another in a voluntary exchange; Enforceability Property rights should be secure from involuntary sudden occurrence or excessive use by others. An owner with a well defined property right has a powerful incentive to use that resource efficiently because a decline in the value represents a personal lost. 3

4 ECONOMICS OF POLLUTION (cont.) In a system with well-defined property rights and competitive markets, producers and consumers try to maximize their surplus. Source: Tietenberg, Efficient economic market induces self-interested parties to make choices which are efficient from the point of view of society as a whole. 4

5 ECONOMICS OF POLLUTION (cont.) EXTERNALITIES In practice, some of the properties rights are violated, mainly when an agent making a decision doesn t bear all consequences of his action. Example: A steel plant and a resort hotel are located by a river. Steel plant located upstream, uses the river as a receptacle for its waste Hotel downstream, uses the river as water recreation for the customers The steel company doesn t support the cost of reduced business resulting from its waste dumped into the river. It could be expected to dump too much waste into the river, with the consequent inefficient allocation of the river. Externality Whenever the welfare of some agent depends not only on his activity but also on activities under the control of some other agent. 5

6 ECONOMICS OF POLLUTION (cont.) The effect of the external cost on the steel industry, associated with the pollution, is considered by the society, increasing the marginal cost related with the production of steel. The difference between the social marginal cost and the private marginal cost is the Externality. Source: Tietenberg, This additional cost should be considered to keep the equilibrium price in a higher value, so decreasing the pollution production to social acceptable values. 6

7 ECONOMICS OF POLLUTION (cont.) TYPES OF EXTERNALITIES Negative and positive externalities According with the type of influence that the externality does about the affected agent. In the economics of pollution s context, the negative externalities allow represent the consequences of pollution. The positive externalities are also currently in environment, e.g. the positive value of a charming landscape. Pecuniary and non-pecuniary externalities Depending if the externality is transmitted through altered prices or with other alternative factors. The pollution is a typical example of a nonpecuniary externality. Without pecuniary externalities, the price signals would fail to sustain an efficient allocation of a resource. 7

8 ECONOMICS OF POLLUTION (cont.) CIRCUMSTANCES WHICH CAN CAUSE EXTERNALITIES 1) Improperly designed property rights system The state-property regimes exist to varying degrees in virtually all countries of the world. The parks and forests are frequently owned and managed by the governments. The common-property resources are those which are owned in common, rather than privately. Can exhibit different part of efficiency and sustainability depending on the rules made by collective decisions. The open-source resources has become known popularly as the tragedy of the commons. The open-source resource is characterized by non-exclusivity, the resource can be exploited by anyone, and by the divisibility, the capture of part of the resource subtracts it from the available amount of resource. The unlimited access destroys the incentive to conserve and the efficient allocation of the resource. 8

9 ECONOMICS OF POLLUTION (cont.) CIRCUMSTANCES WHICH CAN CAUSE EXTERNALITIES 2) Public goods Several common environmental resources are public goods, e.g. charming landscape, clean air, clean water and biological diversity. The public goods have some particular characteristics of consumption: once the resource is provided, even those who fail to pay for it cannot be excluded from enjoying the benefits it confers nonexcludability - and the one person s consumption of a good doesn t diminish the amount available for others - indivisibility. The quantity of biological diversity, per instance, can not be produced by the private sector. For consequence of the nonexcludability and the indivisibility any consumer can receive the benefit of any diversity purchased by other people. It would tend to diminish incentives to contribute for the efficient amount of good and it would be undersupplied. 9

10 ECONOMICS OF POLLUTION (cont.) CIRCUMSTANCES WHICH CAN CAUSE EXTERNALITIES 3) Imperfect market structures Environmental problems also occur when one of the participants of an exchange of property rights is able to exercise an excessive power over the outcome. Monopolies violate the definition of efficiency in the goods market and clearly play an important role in environmental problems. The major oil-exporting countries, per instance, have formed a cartel resulting in higher than normal prices and lower than normal production. This inefficiency in the good markets would be compensated by the reduction in social costs caused by the lower levels of pollution resulting from the reduction in the combustion of oil. 10

11 ECONOMICS OF POLLUTION (cont.) CIRCUMSTANCES WHICH CAN CAUSE EXTERNALITIES 4) Divergence of social and private discount rates If the risk of certain private decisions is different from the risk faced by society as a whole, the social and private discount rates will diverge. Per instance, if some company is afraid its assets will be taken over by the government, it may choose a higher discount rate. For the society, this is not a risk so a lower discount value is appropriated. When private rates exceed social rates, the production is higher than is desirable to maximize the net benefits to society. 5) Government failures The political processes are the source of some environmental problems. Some special interest groups use the political process to manipulate the economy or the environmental legislation, seeking special monopoly privileges or requiring special protection from economic competition. 11

12 ECONOMICS OF POLLUTION (cont.) HOW? 12

13 ENVIRONMENTAL POLICY INSTRUMENTS CONCEPT The mean used by the environmental authority to promote the implementation of measures by the agents or to change their behaviours in a desired direction. CLASSIFICATION 1 st category: Command and Control or direct regulation instruments 2 nd category: Economic or market instruments 3 rd category: Information instruments 13

14 ENVIRONMENTAL POLICY INSTRUMENTS (cont.) PERFORMANCE EVALUATION CRITERIA Environmental Effectiveness The capacity to fulfill the goal defined by the environmental authority Economic Efficiency The capacity to reach the environmental goal with the least cost possible (better relation cost-effectiveness) Dynamic Efficiency/Incentive to technological development Incentive to innovation offered by the instrument, make use of more efficient technologies to control pollution Equitability and political acceptance Distribution of benefits and costs among the society actors, as well as public involvement and acceptance from the agents Revenues The capacity to raise revenues and how to use those revenues Enforcement capacity The capacity of the authority to put into effect the environmental legislation 14

15 COMMAND AND CONTROL INSTRUMENTS CHARACTERISTICS Existence of an Environmental Authority: - Function: Define targets, technologies and behaviours to be adopted by the economic agents Mandatory Instruments: - Obligation of the economic agents, establishment of sanctions Environmental control is made through the quantity: - Economic agents are obliged to respect the limit quantity that is imposed to their activities (absence of an economic dimension) 15

16 COMMAND AND CONTROL INSTRUMENTS (cont.) TYPES OF NORMS Emission Norms set the maximum limit for the rejection of a specific pollutant, e.g. air and water pollutants, noise Environmental Quality Norms Set the allowable concentration of the pollutant in a physical mean, e.g. maximum concentration of nitrates in the water Product Norms define the characteristics of the product itself, e.g. quantity of a component in the product Procedural Norms define the technical processes of a production activity, the anti-pollution equipments to install, e.g. the high of a chimney 16

17 COMMAND AND CONTROL INSTRUMENTS (cont.) ADVANTAGES VS DISADVANTAGES + Environmental Effectiveness Assure that the environmental goals are accomplished There is no incentive to go beyond the control level - Do not promote innovation/technological development the target is the same Control costs are not considered control is made only by the quantity, and no matter the control costs the agents have to respect the limit on the amount of the pollutant imposed 17

18 COMMAND AND CONTROL INSTRUMENTS (cont.) CONTROL COSTS Goal: Reduce emissions by 15 units How? Cost-Effectiveness Solution Minimization of total control costs Reduction of 10 units by source 1 and 5 units by source 2 (Cmg1=Cmg2) Source: Tietenberg, CAC instruments: - Control is made only by the quantity, so the solution would be 7,5 units by each source Inefficiency Cost higher total costs 18

19 MARKET BASED INSTRUMENTS ECONOMIC INSTRUMENTS The use of environmental taxes in OECD countries increased by over 50% between 1987 and 1994 New Market oriented atmosphere! WHY? Appeared as an evolution of the control and command instruments; Increased recognition of the limitations of government and of traditional command and control system of environmental regulation; Desire to make further progress with the implementation of the polluter pays principle, to internalize environmental costs into the prices of the relevant products and activities; 19

20 MARKET BASED INSTRUMENTS (cont.) ECONOMIC INSTRUMENTS Unlike the command and control instruments, do not oblige the agents to meet a goal set, to use certain technology or to adopt a particular behavior; Have character of incentives, making the control by the price, leaving the freedom to companies to choose the most appropriate strategy for its activities; Are based on the correction of prices in existing markets that present distortions or in the creation of new markets that will internalize the externalities 20

21 MARKET BASED INSTRUMENTS (cont.) ADVANTAGES They incorporate the costs of environmental damage into the prices of goods, services or activities which give rise to them; They create incentives for producers and consumers to shift away from environmentally-damage behavior, so reducing the damage; For producers they may act as a spur to innovation even in short term; They raise revenues which can be used for a variety of purposes, some of which improve the environment or give further incentives to do so. 21

22 MARKET BASED INSTRUMENTS (cont.) The Taxes and Charges will raise Revenues and may be used: to address environmental problems directly; to subsidize producers or consumers to shift to more environmentallybenign activities; to prevent regressive effects from the taxes and charges; to other government purposes. 22

23 MARKET BASED INSTRUMENTS (cont.) EXAMPLES Emission taxes Utilization taxes Subsidies (emission reduction) Differential taxes on products / Tax exemptions (lead or unleaded gasoline) Licenses / Rights Transaction (CO2 market) System of deposit (carcasses of cars) 23

24 MARKET BASED INSTRUMENTS (cont.) Environmental Taxes and Charges Classification: Cost-Covering Charges Incentive Taxes Revenue-Raising Taxes 24

25 MARKET BASED INSTRUMENTS (cont.) Cost-Covering Charges First category of environmental taxes applied. Arose from the implementation of the polluter pays principle; Created following the application of instruments of command and control, in addition, in order to make the environment users pay the cost for investment, operation, monitoring and environmental control. It seem appropriate that the regulation should be paid by those being regulated; Ex: - wastewater charge, waste charge; - landfilled waste tax 25

26 MARKET BASED INSTRUMENTS (cont.) Incentive Taxes Aim to encourage a change on economic agents behaviour in order to reduce environmental damage and could focus in emissions or in resources use; The value of the tax must be fixed taking into account the environmental cost as well the cost of control structure of the agents; Should be high to have an incentive effect; If the revenues are small it indicate that the desired incentive effect is working. Ex: - Plastic Bags, Batteries, etc - Use of unleaded gasoline (tax differentiation on fuels) 26

27 MARKET BASED INSTRUMENTS (cont.) Allocation of property rights / Market creation Mix of two kinds of instruments (control by the amount and by the price) It happens in 2 steps: 1º Environmental Authority determines the objective of the policy and the corresponding number of rights that will be placed on the market (limits the emissions by the amount) 2º It allows the agents to transact between them the rights they hold. As the rights distributed are less than the needs, occurs the incentive to technological improvements and the trade of rights. 27

28 MARKET BASED INSTRUMENTS (cont.) VOLUNTARY AGREEMENT With these instruments, the agents assume with environmental authorities quantitative and qualitative commitments to improve their environmental performance; Examples: Agreements based on overall objective quantified; Agreements based on the achievement of certain standads of operation; Agreements on cooperation in R&D to achieve environmental objectives; Agreements for monitoring and provision of information 28

29 INFORMATION INSTRUMENTS What is Information? - It is a chain of identification, collection, processing, management and dissemination of data in ways that enable consumers, producers and public authorities to improve the quality of their decisions. It must be reliable, transparent, accessible and available in a form that allows their use. Pretend to inform about the quality of environment and the pollution generated, as well about environmental features of their activities, products and processes; 29

30 INFORMATION INSTRUMENTS (cont.) On the capital market the availability of information on the environmental performance of companies, together with their financial performance it is increasingly important to investors in the choice of companies with better environmental performance On products market this instruments has the objective to change consumption patterns and the choose of less environmental impacts products Usually, in some way, the agents get advantages when doing this; 30

31 INFORMATION INSTRUMENTS (cont.) EXAMPLES Toxic Release Inventory Program: since 1987, in USA, all the companies that import, produce or process toxic substances have to elaborate annual reports with information about it. Ecological Label: instrument of volunteer information because only the interested producers compete to it. In result, the consumers can identify the products with less environmental impacts and being admissible a preference for them and also to pay more. Biological Agriculture Certification Blue Flag on EU beaches that fulfill requirements of cleaning and water quality. 31

32 ENVIRONMENTAL POLICY INSTRUMENTS WHAT S S THE BEST CHOICE? There are no one-size-fits-all Define criteria, set priorities choose the instrument that better fits with our policy Complementary instruments CAC assurance of minimum environmental goals Economic promotion of economic and environmental efficiency; innovation; and generation of revenues Information Effectiveness raising of CAC and Economic instruments Experience in recent years shows that the question of which instrument is best has changed to which mix of instruments is best (EEA, 2005) 32

33 REFERENCES Ekins, P. (1999). European environmental taxes and charges: recent experience, issues and trends. Ecological Economics, 31, pp European Commission (2005). ExternE, Externalities of Energy. European Environmental Agency (EEA) (2005). Market-based instruments for environmental policy. EEA technical report, No 8/2005, Copenhagen. Faucheux, S., Noël, J.F. (1995). Economia dos Recursos Naturais e do Meio Ambiente. Instituto Piaget. Ferreira dos Santos, R., Antunes, P. (n.d.). Stern Review: The Economics of Climate Change. Tietenberg, T. (2003). Environmental and Natural Resource Economics. 33