PRINCIPLES OF ENVIRONMENTAL POLICYMAKING

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PRINCIPLES OF ENVIRONMENTAL POLICYMAKING

• David ZilbermanJennifer Alix
• Department of Agricultural and Resource
  EconomicsUniversity of California, Berkeley

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Presentation Outline

• Identifying the problem
• Toward policy interventions
• Constraints on policymaking and implementation
• Other considerations

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Identifying the problem Scale Global vs. Local

• Global Environmental Problems
• -require cooperation among many countries
• -resources in question are so large that
  everyone must share (ex. Air, transboundary
  rivers, ozone layer) or
• -resources in question are so mobile that they
  cross national borders (ex. Migratory birds and
  straddling fish stocks)
• Local Environmental Problems
• -can be dealt with at the local or regional
  levels (ex. Pesticide contamination, industrial
  pollution, soil erosion)

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CAUSES OF ENVIRONMENTAL PROBLEMS

• Externalities in production process
• Tragedy of the commons
• Public goods
• Myopic behavior
• Failures of governance

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Externalities in production

• Definition damages to the environment
  resulting from production or consumption
  activities
• Pollution
• Residues of a chemical application
• Runoff of toxic material
• Reasons People do not pay for unintended impacts
  of their actions (Missing Markets)

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Point vs. non-point pollution

• Point source pollution has identifiable source
• Non-point occurs where many contribute to
  pollution
• Solution for point source- pollution tax, subsidy
  or regulation
• For non point- tax or regulation of activities
  correlated with pollution. Examples
• tax on cows/acre to reduce animal waste
• Gasoline tax to reduce carbon emission

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Production externalities and failure of
competitive markets
 MPC Marginal private cost MEC Marginal
externality cost MSC Marginal social cost
(vertical sum of MPC and MEC) Social optimum at
B (where DMSC)
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Tragedy of the commons

• Over-utilization of a resource shared by many
• When many own, no one is charge
• Examples Overgrazing, groundwater contamination,
  pesticide resistance buildup, depletion of
  forests and fisheries
• Caused by users who are in a race to capture the
  benefits provided by the resource.
• I will not have tomorrow what I am not using
  today

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Public goods

• 2 characteristics of public goods
• -Non-rivalry (it can be used by many people
  simultaneously)
• -non-excludability (there are no barriers to
  utilizing it)
• Example Biological diversity, air quality
• Problem Little incentive to contribute to its
  preservation.
• Free Riding

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Myopic Behavior

• Short-sighted or myopic behavior
• Reasons
• 1) lack of knowledge regarding the consequences
  of resource use.
• 2) agent discounting the future at a high rate.
• -present-day survival for the extremely poor.
• -high-risk activities/uncertainty
  (uncertainty of the nature of property,
  possibility of civil unrest, etc)

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Failures of governance

• Examples of government failure
• -Poorly planned or inappropriately applied
  government policies
• -Failure to clearly explain rules to a regulated
  population
• -Enforce policies with preference to particular
  groups

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Toward policy interventions

• Policy objectives
• Policy outcomes
• Policy tools

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POLICY OBJECTIVES

• Efficiency
• Cost effectiveness
• Distributional objectives
• Variability reduction
• Environmental and health quality parameters

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Efficiency

• Getting the most out of the resource base
• Maximizing over-all net benefits
• When many agent share a resource- being on a
  frontier
• Pareto efficiency All outcomes where it is
  impossible to make individual better off without
  hurting some else
• The largest cake you can bake
• All the ways you can cut and distribute the
  cake without any waste

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Efficiency includes environmental consideration

• Correct efficiency assessment should include
  impacts on
• Production and the environment
• Present and future generations
• The complete system
• Recognize all feasible technological solutions
• Ignoring elements of the system leads to
  inefficiency

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Cost effectiveness

• Least-cost policies to achieve a policy target
• To find first-best outcomes Maximize social
  benefit - cost, taking into account both
  environmental and market impacts
• To find cost effective outcome Minimize market
  cost to achieve environmental objective
• Cost effectiveness is pursued when environmental
  valuation is difficult

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Distributional objectives

• Efficient outcomes are not equitable (Ex. It is
  possible to have an efficient resource allocation
  where 90 percent of societys resources are
  controlled by 5 percent of its population).
• Lorenz Curve measure of equity
• 2 ways to redistribute
• 1) maximize the well being of lowest-income
  groups.
• 2) aim to achieve a given level of income or
  well-being at maximum level of equality

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Variability reduction

• Reduction of uncertainty and fluctuation
• Examples Flood control projects, marketing
  boards for non-perishable agricultural goods

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Environmental and health quality improvement

• To implement requires quality indicators
  -Specific measures of environmental and human
  health conditions.
• 1) environmental/health indicators may serve as
  an objective to be maximized subject to a budget
  constraint
• or
• 2) a policymaker may take a cost-minimization
  approach and design policies to achieve a target
  level of environmental or health conditions.

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POLICY OUTCOMES

• Behavior modification
• Resource reallocation
• Resource and capital augmentation

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Behavior modification

• Individuals pollute less, work harder, adopt a
  new technology
• Short vs. Long-run behavior modification
• -Short run modification consists of changes in
  existing production and consumption
  patterns-within a given technology
• -Long run change may involve adoption of new
  practices and technologies.

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Resource reallocation

• Change in income distribution. (Ex. welfare
  policies resulting in a transfer of income to
  poor or disadvantaged groups).
• Change in land allocation and other resources
  (Ex. reduce agricultural land and increase the
  land used for environmental services).

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Resource and capital augmentation

• Policies often result in the expansion of
• -Physical capital (Infrastructure. Ex. dams)
• -Human capital (Transfer of knowledge and skills)
• -Natural capital (Ex. Improvement in
  environmental quality, less depletion of
  resources)
• Research leads to improved technologies that
  reduce pollution thus improving natural capital
• Education improves human capital and sometimes
  natural capital

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POLICY TOOLS

• Incentives
• Direct control
• Establishment of property rights and trading
• Education, information and communication
• Improvements in governance
• Compensation scheme

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Incentives

• Incentives may include
• carrots such as subsidies
• sticks such as taxes and penalties. Good policies
  are incentive compatible -individuals incentives
  are aligned with societys objectives
• Key to the design of incentives
• understanding the factors that affect
  decision-makers choices. estimating how these
  choices are aggregated and affected by market
  outcomes

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Tax v. Subsidy

• Different incentives may result in the same
  desirable outcomes, but may have different
  distributional effects.
• Example a tax on pollution and a subsidy to
  reduce pollution may result in the same final
  pollution level, but
• polluters will be better off with the subsidy
• may lose from the tax.

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Private vs. public optimality

• Private optimum is 5 units while public optimum
  is 3 units
• Policies
• Tax of 6 per unit of input
• Subsidy of 6 per unit of input below 5
• Impact of tax loss of 24 (initial profits30
  after-tax profits6)
• Impact of subsidy gain of 6 (initial30,
  after-subsidy profits36)

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Illustration of tax v. subsidy
Desired consumption level 6 Lb Government
can -Set per pound tax that equals the average
damage from pollution (5 per Lb for 6 Lb). Tax
forces consumers to pay for the cost of the
pollution that their consumption produces.
-Subsidize producers to make it worth their
while to provide 6 Lb. In this case, the
government will have to transfer 34 dollars.
Distributional effects Tax consumers are hurt,
the government gains revenue Subsidy coal
companies are happier, the government loses
revenue. Environmental damage same in either
case
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Graph of tax v. subsidy
-Before tax on consumption DemandMB. -After
tax on consumption NMB is shifted downward by
the amount of the tax. Output is reduced to the
desired level, Q. The price paid by consumers
is Pc and the amount received by producers is
Ps Pc - t -Subsidy Pay producers a per unit
price NOT to produce a certain amount of output
to reduce the output to Q.
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Direct controls

• Policymakers may order members of society to
  conduct certain activities. (Ex They limit
  pollution per unit of output, disallow driving
  older cars, require catalytic converters )
• Why use direct controls?
• Distributional reasons. Cleaner but inefficient
  organizations will benefit from standards
• Monitoring considerations. It is often easier to
  legislate and monitor a standard than to impose
  and collect a tax- tax on pollution require
  observing it. Standard disallowing certain
  equipment requires easy to observe information
• Political economic reasons- producers may prefer
  standard as it reduces their costs less even
  though it is less efficient overall.
• Outcomes of standards on pollution may be more
  certain and immediate-but may be much more costly

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Establishment of property rights and trading
(tradable permits)

• Policymakers may establish property rights
  legislation, enforce these rights, and allow
  trading to improve resource use efficiency. (Ex.
  Water trading in California).
• Policymakers may establish overall policy targets
  for pollution and distribute firms pollution
  rights that are proportional to their historical
  share in aggregate pollution. Based on these
  rights, firms may trade among themselves.
• Distributional effect Polluters will lose less
  under transferable rights than under tax, but
  will not gain as much as with subsidies.

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Education, information, and communication

• Education can inform people of consequences of
  their activities. (Ex. Farmers may modify waste
  management practices if they learn that these
  practices contaminate a lake they use).
• Education can modify preferences and lead to
  change in behavior. (Ex. People may learn to
  appreciate the environment, value the
  preservation of natural resources, and thus
  behave in a more environmentally friendly way).
• Education can inform the public of the firms that
  generate the most pollution. This may induce
  some of these firms to change their practices
  because this information may reduce the demand
  for their products.

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Improvements in governance

• Responsiveness of a government is important.
  This requires all the components of good
  governance transparency, representatives, and
  efficiency.
• Public involvement Non-governmental
  organizations are important players both in
• Monitoring government activities
• providing funding to finance purchase of
  environmental services.
• help educate the public.
• Increased involvement of communities is
  particularly important for the poor, who often
  find no outlet for their voice in government
  affairs.

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Compensation scheme (for environmental services)

• Incentive for providing public goods as the
  Benefit/cost of public goods may vary across
  groups.
• Example Some developed countries may benefit
  more from preservation of biodiversity while
  developing countries that may have to bear much
  of the cost to maintain it. Payment for
  environmental services may be needed in these
  cases.

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Constraints on policymaking and implementation

• Budget and resource availability
• Knowledge
• Ability to enforce and monitor

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Budget and resource availability

• The budget constraint includes an upper bound on
  spending
• Resource constraints are limitations of personnel
  and equipment availability. (Ex. untrained
  staff, lack of computers)
• Good policy maker knows his limitations and
  expands her capacity
• Constraints change policy design-
• Lower budget restricts attainable environmental
  goals
• Untrained staff limits use of sophisticated
  regulations

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Knowledge

• Policymakers need two types of information
• 1) Scientific information on relationships
  between key physical variables.
• Ex. pesticide control policy needs knowledge of
  the relationship between exposure to toxic
  material and health situation. It also requires
  understanding of the factors that determine the
  effectiveness of pesticides and their impact on
  productivity.
• 2) Understanding of human behavior and responses
  to incentives.
• Ex. Endangered Species Act- punish people that
  report of the species.

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Ability to enforce and monitor

• There are many good rules in the book- but not
  many are enforced
• The ability to enforce and monitor could be
  constrained by the agencys budget.
• When agencies use fines and penalties to finance
  their activities -it affects enforcement efforts,
  and biases outcomes.
• Frequently, part of monitoring effort is directed
  at the bureaucracy that enforces the policy. When
  policies are complex and ambiguous, there is room
  for error and misinterpretation that may breed
  corruption.

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Other considerations

• Dynamic considerations
• Heterogeneity
• Political economy

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DYNAMIC CONSIDERATIONS

• Adaptive learning
• Irreversibility

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Adaptive learning

• Policy design should be flexible and contain
  mechanisms to collect information, learn and
  adjust.
• Most policy analysis is done prior to the
  implementation of the project (ex ante), but it
  is also essential to analyze project impact ex
  post and learn from mistakes.
• Ex post analysis is fundamental to the successful
  implementation of environmental policy because
• policies often have unexpected consequences
• There is uncertainty about systems that resolved
  through learning from experience

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Irreversibility

• Some projects, such as dams and large
  infrastructure projects, may be irreversible or
  very costly to reverse. Design of these projects
  requires extra care and learning, especially when
  there is uncertainty regarding future scenarios.
• Do not rush to execute the moment expected net
  benefits are positive. They may increase over
  time.
• Good timing is essential for successful policy
• Delay that may resolve uncertainty is valuable

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HETEROGENEITY/Diversity

• People and systems are unique- good policy design
  recognizes heterogeneity.
• Example When firms differ in their ability to
  abate pollution level, policies have to lead to
  reduce more pollution of firms that do it with
  less pain.
• Heterogeneity may caused by differences of
  location. The potential damage of a air
  pollution plants far from cities is much smaller
  than that of a plants built next to a densely
  populated urban area- and policies should reflect
  this.
• Heterogeneity leads to gains from trading

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Transferable permit system
Transferable permit system accounts for
heterogeneity.
MSC is the marginal social cost of pollution.
The two curves labeled MB1 and MB2 are the
benefits that accrue to the two polluters for
producing their waste.
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Political economy

• Policy-making is not conducted in a vacuum.
  Rather, it is a process of negotiation and
  interaction with interest groups.
• Policy analysis should not only look at total
  impact, but also provide estimates of impacts of
  a proposal on various groups.  

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Summary

• Environmental policy should be
• Science-based
• Incentive compatible (aware of human behavior)
• Politically savvy
• Policies that aim to correct market failure
  shouldnt generate market failure
• Implementation matters Policy on the books and
  not in the field is dead
• Policy-making is a dynamic process lessons of
  experience should lead to adaptation

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• The intention of this presentation has not been
  to be an exhaustive guide to policy analysis, but
  rather an introduction that attempts to put some
  order into the complicated process of
  policymaking.