Policy instruments for environmental protection

Transcription

1 Policy instrments for environmental protection dr Magdalena Klimczk-Kochańska Market approach refers to incentive-based policy that encorages conservative practices or polltion redction strategies Difference between market approach and command-and-control approach is how each approach attempts to achieve its objectives Types of Market Instrments Polltion charges Sbsidies Deposit/refnd systems Polltion permit trading systems 1

2 Polltion Charges Polltion Charge Fee that varies with amont of polltants released Based on Pollter-Pays Principle Types of polltion charges Efflent/emission fees Prodct charge User charge Administrative charge 2

3 Prodct Charge Fee added to price of polltion-generating prodct, which generates negative externality Impose prodct charge as per nit tax on prodct, e.g., gas tax If the tax eqals the marginal external cost (MEC) at Q E, it is called a Pigovian tax Modeling a Pigovian Tax MSC = MPC + MEC MPC t a b MPC Amont of tax MPB = MSB 0 Q E Q C Q of gasoline 3

4 Assessing the Model In theory, achieves an efficient otcome In practice, difficlt to identify the vale of MEC at Q E Allows only for an otpt redction to redce polltion Emission Charge A fee imposed directly on the discharge of polltion Assigns a price to polltion Typically implemented throgh a tax 4

5 Model: Single Pollter Case Government sets an abatement standard at A ST Policy options to pollter are: Abate p to A ST and incr those costs OR Pay a constant per nit tax, t, on any abatement less than A ST Total Tax = t(a ST -A O ) where A O is actal abatement level Marginal Tax (MT) = t Becase t is constant Firm will choose the least-cost option: the marginal tax (MT) or the marginal abatement cost (MAC) Modeling Emission Charge Single Pollter $ Firm abates p to Ao since MAC < MT; firm pays tax between A O and A ST, since MAC > MT in that range c MAC 0aA O = cost to abate A O A O aba ST = tax on polltion not abated p to A ST t a b MT 0 A O A ST Abatement (A) 5

6 Model: Mltiple Pollter Case To facilitate comparison, we se the same model as in the niform standard case Assmptions 2 pollting sorces in some region Each generates 10 nits of polltion Government sets emissions limit for region as 10 nits, which implies A ST = 10 Policy: To achieve A ST, government imposes an emission charge as a nit tax (t) of $5 Model: Mltiple Pollter Case Each firm responds as in the single pollter case Abates as long as MAC < MT Pays emission charge when MAC > MT Pollter 1: TAC 1 = 1.25(A 1 ) 2 MAC 1 = 2.5(A 1 ) where A 1 is polltion abated by Pollter 1 Pollter 2: TAC 2 = (A 2 ) 2 MAC 2 = 0.625(A 2 ) where A 2 is polltion abated by Pollter 2 Find each firm s abatement level. Then, find each firm s total abatement costs (TAC) and tax payment at that level. Spport with a graph. 6

7 Pollter 1: Abates p to the point where MAC 1 = MT, Set 2.5(A 1 ) = $5, or A 1 = 2 Incrs TAC 1 = 1.25(2) 2 = $5 Incrs Total Tax = 5(10-2) = $40 Pollter 2: Abates p to point where MAC 2 = MT Set 0.625(A 2 ) = $5, or A 2 = 8 Incrs TAC 2 = (8) 2 = $20 Incrs Total Tax = 5(10-8) = $10 Modeling an Emission Charge Mltiple Pollter MAC 1 MAC 2 Total Abatement Level = 10 = A s TAC 1 + TAC 2 = $25 (right triangles) Total Tax Payments = $50 (rectangles) MT = 5.00 MT = Pollter 1 s Abatement Pollter 2 s Abatement 0 7

8 Assessing the Model -advantages Abatement standard is met Generates $40 in tax revenes from high-cost abater and $10 from low-cost abater Low-cost abaters do most of cleaning p Cost-effective soltion is obtained MACs are eqal at $5 tax rate Combined TAC of $25 is lower than $39.06 nder command-and-control with a niform standard Assessing the Model - disadvantages Tax athority will not know where MACs are eqal Will have to adjst rate ntil objective achieved Monitoring costs potentially higher Firms might evade tax by illegally disposing polltants Distribtional implications Consmers may pay higher prices de to tax Job losses may reslt from pollter paying new taxes and/or changing technology to abate 8

9 Polltion Charges in Practice Internationally, the polltion charge is the most commonly sed market-based instrment Some contries se efflent charges to control the noise polltion generated by aircraft Others levy charges on prodcts sch as motor vehicles, pesticides, fertilizers, batteries and gasoline Environmental Sbsidies 9

10 Environmental Sbsidies Two major types of sbsidies: Abatement eqipment sbsidies Polltion redction sbsidies Abatement Eqipment Sbsidy Defined as a payment aimed at lowering the cost of abatement technology Goal is to internalize the positive externality associated with the consmption of abatement activities If the sbsidy (s) eqals the marginal external benefit (MEB) at Q E, it achieves an efficient eqilibrim and is called a Pigovian sbsidy 10

11 Pigovian Sbsidy Market for Scrbbers ($ millions) MSC P E = 175 K Sbsidy = $14 million P C = 170 P E s = 161 L MPB S MSB MPB 0 Q C = 200 Q E = 210 Q of scrbbers Assessing the Model It is difficlt to measre the MEB May bias pollters decisions abot how best to abate 11

12 Polltion Redction Sbsidy To implement, government pays the pollter a sbsidy (s) for every nit of polltion abated below some pre-established level Z ST Per nit sbsidy = s(z ST -Z O ), where Z O is the actal level of polltion Analogos to an emission charge Assessing the Model Might be less disrptive than an eqipment sbsidy Can have the perverse effect of elevating polltion levels in the aggregate since the sbsidy lowers nit costs and raises profit, encoraging entry 12

13 Sbsidies in Practice Environmental sbsidies typically are implemented as grants, low-interest loans, tax credits or exemptions, and rebates Many contries arond the world se these instrments, inclding Astria, Finland, Japan, and Trkey In the U.S., common ses inclde federal fnding to bild pblicly-owned treatment works and sbsidies to encorage the development of cleaner fels and lowemission vehicles Deposit / Refnd Systems 13

14 Deposit/Refnd Systems A deposit/refnd system is a market instrment that imposes an p-front charge to pay for potential damages and refnds it for retrning a prodct for proper disposal or recycling The deposit is intended to captre the MEC of improper waste disposal (IW) in advance Modeling Deposit/Refnd System IW disposal market MEC IW : health damages + aesthetic impairment from litter, trash accmlation, etc. MPC IW : costs to disposer (e.g., trash receptacles, collection fees, pls forgone revene from not recycling) MSC IW = MPC IW + MEC IW MPB IW : demand for improper disposal Assme MEB IW = 0, so MPB IW = MSB IW 14

15 Deposit / Refnd Model Deposit converts % of overall waste disposal, measred by (Q IW - Q E ), from improper methods to proper a b MSC IW MPC IW + Deposit MPC IW Deposit=MEC at Qe MPB IW = MSB IW Q E Q IW Improper Waste Disposal (%) 100 Proper Waste Disposal (%) 0 Assessing the Model Promotes responsible behavior Reqires minimal spervision by government Can help slow the se of virgin raw materials by improving availability of recycled materials 15

16 Deposit /Refnd Systems in Practice Deposit/refnd systems are sed worldwide Many nations se these systems to encorage proper disposal of beverage containers I n the US, 11 states have bottle bills Other applications inclde systems sed to promote responsible disposal of sed tires, car hlks, and lead-acid batteries Polltion Permit Trading Systems 16

17 Polltion Permit Trading Systems Apolltion permit trading system establishes a market for rights to pollte by issing tradeable polltion credits or allowances Credits are issed for emitting below a standard Allowances indicate how mch can be released Two components of the system are 1. Fixed nmber of permits is issed based on an acceptable level of polltion set by government 2. The permits are marketable Bargaining gives rise to a market for polltion rights How Permit Trading Works There is an incentive to trade as long as pollters face different MAC levels Sppose a firm has 50 permits bt normally emits 75 nits of SO 2. What mst it do? Answer Abate 25 nits of emissions OR By 25 permits from another prodcer Which option will the firm choose? Answer Whichever option is cheaper 17

18 Low-cost abaters will clean p polltion and sell excess permits to other firms They will sell at any P higher than their MAC High-cost abaters will by permits rather than abate They will by at any P lower than their MAC Trading will contine ntil the incentive to do so no longer exists, at which point, the cost-effective soltion is obtained, i.e., the MACs across firms are eqal Assessing the Model Trading establishes the price of a right to pollte withot government trying to search for a price No tax revenes are generated Trading system is flexible Note that an emissions standard can be adjsted by changing the nmber of permits issed 18

19 Polltion Trading Systems in Practice International examples Trading of greenhose gas allowances are part of the Kyoto Protocol, an international accord aimed at global warming Canada has a trading program for ozone-depleters Denmark has one for carbon dioxide emissions Most of the evoltion of trading is occrring in the U.S. An important example is the establishment of an allowancebased trading program to control slfr dioxide emissions nder the Clean Air Act Amendments of 1990 Types of Economic Incentives Deposit-refnd systems are a good way of employing economic incentives when monitoring costs are high. This system is based on reqiring a payment p front for ndesirable acts and then bilding in a refnd when a desirable action occrs. The most common example of this is the depositrefnd system in place for beverage containers. This system has also been sed for cars and batteries in other contries

20 Types of Economic Incentives Bonding systems are closely related to deposit-refnd systems. A bonding system reqires a potential degrader of the environment to place a large sm of money in an escrow accont. This money is retrned if the environment is ndamaged (or retrned to its original condition) and will be forfeit otherwise. Bonds need to be large enogh to provide an incentive to se appropriate safegards and/or cover the cost of clean p if damage occrs. 39 Types of Economic Incentives Liability systems are based on defining legal liability for the damages cased by certain types of polltion discharges and facilitating collection of these damages. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) defines legal rights to natral resorces for local, state and federal governments and defines how damages can be recovered. A related system defines legal liability and then reqires potential pollters to obtain fll insrance against any damages. There is a potential moral hazard problem with this option

21 Types of Economic Incentives A system of polltion sbsidies wold pay each pollter a fixed amont of money for each nit of polltion redced. The pollter wold redce polltion to the point where the sbsidy is eqal to the marginal cost of abatement. While the otcome is the same as a tax on pollters, there are distribtional effects, problems with political acceptability and the possibility that strategic behavior wold lead to higher initial levels of polltion in order to obtain the sbsidy. In addition, the sbsidy cold potentially attract more pollters into the indstry. 41 Conclsion Market failres associated with environmental externalities generate losses in welfare. Command and control policies are the basis of crrent policy bt do not eqate marginal abatement costs across pollters. Economic incentives, sch as taxes or marketable polltion permits do eqate marginal abatement costs. While there are some problems with economic incentives, they do create additional motivation for technological innovation to redce polltion

22 The OECD database on Policy Instrments for the Environment Individal assignment Types of Market Instrments Presentation of a few cases of different types of the environmental protection instrments in yor contry Advantages and disadvantages of the environmental protection instrments (e.g. costs of implementation) 22

23 Individal assignment Types of Market Instrments Assignment to be prepared invidally Form: mltimedia presentation in PowerPoint Deadline: 01/16/2016 presentation at classroom, 5-7 mintes 23

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