International Dimensions of Regulation

1
International Dimensions of Regulation

• Developing countries need special attention
• Global pollutants particularly tough to control
• Green Accounting
• Double Dividend

2
Motivation

• Group Project Treaty proposed to free up trade
  between US and Guatemala. What restrictions
  should we put in place to avoid environmental
  degradation in Guatemala?

3
Income effect

• Why are oil refineries in poor areas?
• Why do poor countries have weak environmental
  regulations?
• Can we expect environmental regulations to weaken
  or tighten over time in the US or any country?
• Similar questions as when we considered
  environmental justice.

4
Luxury, Normal and Inferior Goods
Luxury Good (Elast 1)
Amount of Env. Qual. Demanded (at fixed Price)
Normal Good (Elast Inferior Good
Income
5
Larry Summers Memo

• What was Summers suggesting?
• What are the arguments in support of his
  position?
• What are the arguments against his position?

6
GATT and the Environment

• GATT (General Agreement on Tariffs and Trade)
  says
• You can place border restrictions on the quality
  of a product (ie, no chunks of Flipper in the can
  of tuna)
• You cannot place restrictions on how the product
  was produced (you cannot prohibit use of hormones
  in raising beef if no hormones can be detected in
  the imported beef)
• Allows environmental restrictions (eg, protecting
  dolphins) if the restriction allows country to
  choose methods that provide equal levels of
  environmental protection ie, not technology
  standards
• What are the reasons for these rules?
• Do they work in providing environmental
  protection?
• Why did US lose the Venezuelan Refinery Case
  (Sanger article)?

7
Dynamics of Environmental Protection
Shifts with increases in income.
Supply
Price
Demand
Environmental Quality
8
Environmental Kuznets Curve
Sulfur Emissions
Early phases of economic growth tend to increase
pollution
As income rises, clean environment is valued
more, emissions decline
But very difficult to estimate due to lack of
time series
Income
9
Reasons for failure of EKC

• Corruption bribe officials to locate hazardous
  waste sites
• Nondemocratic regimes preferences of population
  not represented in environmental regulations
• Poorly educated population
• Not all pollutants have same shape EKC

10
Back to Group Project

• What are some answers to our original group
  project problem?
• Do we need to put into place safeguards so that
  Guatemala doesnt become dumping ground due to
  corrupt officials?
• Should we worry about differences in regs between
  US and Guatemala, at least in the short-run?
• Will increases in income in Guatemala tend to
  increase env quality?

11
Transboundary Environmental Problems

• Who fixes environmental problems that cross
  national borders?
• Stratospheric ozone depletion
• Global Warming/climate change
• Global species destruction (sea turtles)
• Need IEAs International Environmental Agreements

12
The Card Game Analogy

• SETUP Each player is given two cards one red
  and one black
• PLAY Each player will anonymously hand in one
  card to Center (i.e., to Prof.)
• PAYOFF to each participant after play of game
• 10 Environmental Currency Units (ECU) for a red
  card in your hand
• 1 ECU for each participant for each red card
  Center holds
• Maximum payoff (N-1)5 where N
  participants
• Ex 51 players the maximum payoff is 60
• REWARD
• Anyone scoring over 35 gets a Kiss!
• YOUR TASK figure out what to hand in to the
  Center

13
Choose Your Strategy

• Hand in your red card?
• It yields less to you than if you keep it
• It yields far more to the group than if you keep
  it.
• Society wants you to hand in your red card
• Keep your red card?
• It is worth far more to you in your hand
• Your payoff will be higher societys lower

14
Results

• This experiment has been run many times
• typically ? -- ? of people hand in their red card
• Refer to Scott Barrett (2003)
• When repeated with the same group, cooperation
  (handing in the red card) tends to decline
• Analogous to transboundary environmental problems
• Fundamental conflct between individual and group
  interests
• Self-interest diverges from group interest
• Powerful incentives to shirk your responsibility
• Understanding how to solve card problem gives
  insight into solving transboundary environmental
  problems

15
Can an Agreement Solve Problem?

• A typical agreement
• Signatories agree to hand in red card
• Public display of what is being handed in (red or
  black)
• Only goes into effect if x of people agree (eg,
  60)
• Participants post performance bond before each
  play (who keeps?)
• Issues
• Should be self-enforcing (ie, no appeal to higher
  authority)--problem
• Penalties how to enforce the agreement?
• Penalties for cheating (ie, not handing in red
  card)
• Penalties for free-riding (ie, not joining but
  benefiting from agreement)
• Must create an aggregate gain to participants
• Must be in best interest of individuals to join
  (both cooperators and free-riders) what if
  different countries start with different red
  cards
• Must have means to distribute gain

16
Back to the Real World

• Card game has lessons for the real world
• Goal identify desirable characteristics of
  international environmental agreements

17
How to think of an IEA

• Global problem that affects many countries
• Countries have to voluntarily agree to do
  something about the problem
• Any penalties for cheating must be included in
  treaty
• There can be no overarching enforcer

18
Desirable Attributes of a Successful IEA

• Create an aggregate net benefit to participants
• overall gross benefits overall gross costs
• Distribute the aggregate gain among participants
• For each participant, benefits costs
  (individual rationality)
• Self-interest important in convincing country to
  agree
• Deter non-participation
• Must make it undesirable to remain outside
  agreement
• Trade sanctions most frequently used
• Design net benefits in net benefits out
  (participation constraint)
• Deter cheating among participants
• Penalties must be credible
• Trade sanctions are easiest to use
• Deter entry of new non-participants (avoid
  leakage)
• Particularly appropriate for common property
  problems
• Saving a fishery increases rents and may induce
  non-fishing countries to enter

19
Montreal ProtocolDesigned for CFCs leading to
Ozone Depletion

• Quantitative emission limits for industrial,
  transition and developing countries
• Industrial countries pay for added costs to
  developing countries
• Trade sanctions for non-participants and
  violators
• Initial protocol modest gradually tightened over
  10-year period

Ozone Levels Projected Source World Met Org
20
UN Framework Convention on Climate Change Kyoto
Protocol

• Emerged from Rio Conference in 1992
• US signed and ratified UNFCCC
• Modeled after Montreal Protocol
• Kyoto Protocol (1997) defines emission reductions
  for Annex I (developed) countries
• Developing countries largely exempt
• Penalties for noncompliance missing

21
Montreal vs. KyotoA partial comparison
22
Environmental regulations in the developing world

• Often environment is low on policy priority list
  urge to industrialize
• Policy focus employment income
• Diverse instruments used, hard to generalize.
• Typically market based instruments not as widely
  used or effective.

23
Environmental charges funds

• Central East Europe (planned economies) high
  pollution last few decades
• Attract limited international capital
• Instituted some environmental taxes
• But no bite until decentralized
• Poland careful CBA to attract debt-for-nature,
  unusually successful

24
Planned economy emissions fees

• Sulfur, NOx, carbon, some particulates, lead
• Transportation tolls
• Water extraction charges, water pollution fines,
  waste management fees, fertilizer and pesticide
  fees

25
Regulations in China

• Most populous, poor (5000 per capita GDP), one
  of most polluted countries
• 1979 law allows charging for pollution, by 1994
  2 billion collected.
• Fees charged when emissions above max.
• Fees too low to achieve standards.

26
Fees in Rio Negro, Colombia

• Colombian economy growing quickly
• Water/air pollution major problems
• 1993 law that environmental damages must be taken
  into account
• Stipulates use of economic instruments
• Fees implemented 28 decline in pollution in
  first 6 months

27
Voluntary emissions control in Mexico

• Informal sector in Mexico brick making
• Difficult to monitor, regulate (similar to
  non-point source pollution)
• 20,000 brick kilns burn nasty stuff
• Too difficult to enforce ban on dirty fuels
• Subsidize propane, voluntary switch
• Zoning for certain activities
• Involve local grassroots

28
Info institutions Indonesia

• Rapid economic growth drastic exploitation of
  resources
• Program for Pollution Control Evaluation and
  Rating (PROPER) similar to TRI
• Reporting, evaluating, assisting firms
• Grades each industry, reports in press
• Very successful
• Other countries have adopted similar (Mexico,
  Philippines, Papua New Guinea)

29
Green national accounting

• Measures of national income GNP, GDP
• Dont account for environmental degradation and
  resource depletion
• Can give misleading measure of national
  well-being, may lead to wrong policy.
• Many adjustments have been proposed to correct
  standard measures.

30
Natural capital depreciation

• Natural capital the available endowment of land
  and natural resources
• Measure depletion of natural resources (oil,
  timber, minerals, soils)
• Subtract from standard measures
• Result many developing nations show substantial
  effect

31
Indonesia example Adjusted Net Domestic Product
32
Pollution control cleanup

• How should pollution control and cleanup costs be
  accounted for in developed nations?
• Should cleanup expenditures contribute to GNP?
  Some think not.
• Main issue dont double count. These are
  legitimate expenditures in order to maintain
  environmental values.

33
How are national accounts used?

• Primary use assist policy makers in government.
• E.g. Govt expenditures on scientific research
  are linked to current economic performance and
  climate.
• United Nations has proposed a System of
  Environmental and Economic Accounting, some
  adjustments underway.

34
Paying for public goods

• Public goods will be under-provided,
  externalities will not be internalized in free
  market.
• Government intervention tax revenues can pay for
  cleanup, regulation, public goods provision
• But many taxes distortionary
• E.g. Income tax discourages work!
• Costs 1.40 to raise 1 in revenue

35
Double dividend

• If we substitute distortionary taxes with
  pollution taxes, we may earn a double dividend
• Reduce pollution (and therefore damage from
  pollution)
• Reduce distortionary taxes on labor and thus the
  DWL from those taxes
• This is called the revenue recycling effect

36
A 3rd effect of pollution taxes

• Tax interaction effect
• Polluting good and leisure are substitutes
• E.g. Gasoline and Leisure
• Tax pollution, demand for leisure shifts out
• If labor is still taxed, shift introduces an
  additional DWL attributed to decrease in
  pollution
• This DWL decreases social welfare.
• Overall size of tax interaction effect varies
  among polluting industries
• Estimate pollution tax should be set at 2/3 of
  marginal damage.
• Varies considerably from industry to industry