AGEC 604 Natural Resource Economics Photos: FreeFoto.com Pollution: General Concepts & Stock Pollutants Pollution Overview Two Questions What is the appropriate level of flow? If reduction is necessary, how should the responsibility for achieving this flow level be allocated among the various sources of the pollutant? Pollutant Taxonomy Absorptive Capacity of the Environment Pollutant Damage Pollutant Accumulation Emissions Load Absorptive Capacity Ability of the environment to absorb or assimilate waste products Pollutants Residuals of production and consumption Stock Pollutant Pollutant for which the environment has little or no absorptive capacity 1
Fund Pollutant Taxonomy Cont. Pollutant for which the environment has some absorptive capacity Zone of Influence Horizontal zone Local pollutants damage near the source Regional pollutants damage experienced greater distances from the source Vertical zone Surface pollutants damage caused by concentrations near the earth s surface Global Pollutants damage caused by concentrations in the upper atmosphere Stock Pollutant Efficient Allocation Two Components of a Stock Pollutant Pollutant accumulates in the environment Damage increases as pollutant increases and is persists Nature of Stock Pollutant Interdependency between present and future generations Efficient Allocation Allocation which maximizes the present value of the net benefits from commodity X Benefits - from consuming X Cost production costs plus environmental costs Stock Efficiency 2 Similar to Nonrenewable Resources Nonrenewable Resources Review Extractive costs increase with the cumulative amount of the resource depleted Efficient quantity of the nonrenewable resource extracted and consumed decreases over time and at some point stops 2
Stock Pollutant Stock Efficiency 3 Damage costs associated with the pollutant increases with the cumulative amount deposited in the environment Efficient quantity of X decreases as the marginal cost of damage increases Price of X increases reflecting the rising social costs Steady state solution Additions of the pollutant to the environment stops Production of X stops or recycle stock pollutant Technological Progress Stock Efficiency 4 May modify efficient allocation by Reducing the amount of pollutant produced Create ways to recycle pollutants Ways to render the pollutant harmless Increases time to stop using X Key Using nonrenewable resources imposes a cost on future generations by using up the resource A stock pollutant imposes a cost on future generations by the damages caused The Road Continues 3
AGEC 604 Natural Resource Economics Pollution: Fund Pollutants Photos: FreeFoto.com Fund Pollutant Efficient Allocation Emissions Rates Rate greater than absorptive capacity stock Rate less than absorptive capacity breaks link Usual Objective Maximize net benefits Equivalent Formulation Minimization of damage costs and control costs Fund Efficiency - 2 marginal costs /unit MC control MC damages Q* quantity of pollution emitted (units) Note: Optimal Level of Pollution is Not Zero Q* depends on the shape of the curves Technology, pollutant, human impacts, location etc. all impact the shape 4
Market Allocation Without Intervention Historically Air and water common property resources Overexploited as Waste Repositories Damage caused by pollution is external to the firm Externalities Control cost are not external to the firm Excessive pollution too few resources committed to pollution control Efficient Policy Responses Efficiency Given by Q* MC control = MC damages Requires Knowledge of Both Curves Curves for all sources of emission Very high information requirement Solution Select a specific legal level of pollution based on some other criteria Question How to allocate the responsibility of meeting the pollution level? Cost-Effectiveness Criteria Objective Reduce emissions to a set level at the minimum cost Assumptions Uniformly mixed pollutant Two sources of pollution Want to reduce emissions by B units 5
Cost-Effectiveness Criteria MC 1 MC 2 source 1 0 b * 1 B source 2 B b * 2 0 Conclusion quantity of emissions reduced Cost of achieving a given reduction will be minimized if and only if the marginal costs of control are equalized for all emitters Cost-Effectiveness Criteria - 2 MC 1 MC 2 source 1 0 b 1 B source 2 B b 2 0 quantity of emissions reduced Policy Alternatives Emission Standards Emission Charges Transferable Emission Permits 6
The Road Continues AGEC 604 Natural Resource Economics Photos: FreeFoto.com Pollution: Policy Alternatives Fund Pollutants Emission Standards Policy Alternatives Emission Charges Transferable Emission Permits 7
Emission Standard Emission Standards A legal limit is placed on the amount of pollutant an individual source is allowed to emit Traditional Approach Not likely to be cost-effective Why? Lack of information How to Allocate? Equal reduction for all similar sources Emission Charges Emission Charges Fee is levied on each unit of pollutant emitted Total payment = fee x amount of pollutant emitted Cost c 2 MC of pollution control T c 1 P 1 P T P 2 units of pollution emitted Emission Charges - 2 Cost Effective Allocation Yes all sources will go to the point of MC of control equals the emission charge Appropriate Level of the Emission Charge Level of charge which yields the amount of emissions reduction wanted Trial and error process Set too high Set too low Transitional costs 8
Emission Charges - 3 Stimulates Technological Progress Why? Cost MC b MC a T A B P 1 P 2 units of pollution emitted Transferable Emission Permits Transferable Emission Permit System All sources are required to have a permit to emit pollution Permits are freely transferable Agency issues the number of permits necessary to meet the desired level of pollution Cost-Effective Allocation Stimulates Technological Progress MC 1 Permits - 2 source 1 0 P b * 1 B source 2 B B-P b * 2 0 MC 2 C D* D* A quantity of emissions reduced Conclusion Free market equilibrium is the cost-effectiveness solution Basis for current reforms attempts 9
Charges vs. Permits Both Rely on Economic Incentives Both Cost-Effective Allocation Charge trial and error procedure to get correct level of pollution Charge gives the MC of pollution control Permits gives the level of pollution MC of control defined by the market Charges vs. Permits - 2 Reaction to External Sources Increase number of sources Charge system increase in pollution Permit system increase in MC of control Inflation in Cost of Control Charge real charge of emissions decreases - lowers control Permit higher permit prices increase in control Growing Economy Permit System is Better? Charges vs. Permits - 3 Cost of Being Wrong Imprecise information on damage and control costs Charges greater certainty about MC of control Permits greater certainty about quantity of emissions Objective Minimize Total Costs Damage costs sensitive to being wrong permits Control costs sensitive to being wrong charges Which is Best? Depends! 10
The Road Continues AGEC 604 Natural Resource Economics Pollution: Nonuniformly Mixed Fund Pollutants Photos: FreeFoto.com Nonuniformly Mixed Pollutant Nonuniform Amount of emissions entering the environment plus location of the emitting source determines damages Concentrations at a receptor become the important factor C B Stream R Receptor D A 11
Ambient Standards Mixed - 2 Legal ceiling placed on the concentration level of specific pollutants in the air, water, and/or soil Difference from Uniformly Mixed Emissions what can be controlled Concentrations policy target Transfer Coefficients The amount the concentration at the receptor will rise if source i emits one more unit of pollution Mixed - 3 Transfer Coefficients Cont. k r = a 1 E 1 + a 2 E 2 +... + a n E n + B where: a transfer coefficients E emissions B background concentrations Cost Effective Objective Meet a given concentration level at a minimum cost Marginal costs of concentrations reduced will be equal Example - Mixed Emissions Reduced 1 2 3 4 5 6 7 MC of Emissions 1 2 3 4 5 6 7 Concen. Reduced Source 1 a 1 E 1 1.0 2.0 3.0 4.0 5.0 6.0 7.0 MC of Concen. Source 1 MC 1 /a 1 1 2 3 4 5 6 7 Concen. Reduced Source 2 a 2 E 2 0.5 1.0 1.5 2.0 2.5 3.0 3.5 MC of Concen. Source 2 MC 2 /a 2 2 4 6 8 10 12 14 Concen. Concentration with a 1 = 1.0 and a 2 = 0.5 12
Similar to Uniform Policy Approaches Work off concentrations at receptors instead of emissions More information is needed transfer coefficients Transferable Ambient Permit System Each permit allows a different amount of pollutant based on location Ambient Charges Charge on emissions weighted by the transfer coefficients 13