Environmental Policy

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Environmental Policy

• March 20, 2006

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Market Failure and Open Access

• Market for environmental quality (pollution
  abatement or resource conservation) fails to form
• If the state does nothing about this market
  failure, there is open access to environmental
  quality
• Open access to environmental resources results in
  an inefficient amount of environmental quality

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Environmental Policies

• Replace open access to the environment with state
  ownership of the environment
• The state determines the amount of environmental
  quality (abatement or conservation) that will be
  supplied (Goal)
• The state determines how environmental quality
  (abatement or conservation) will be supplied and
  who pays for it (Means)

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Fundamental Choices in Environmental Policy

• Is there a problem?
• Does the problem warrant regulation?
• How much regulation? (Goal setting)
• Which policy tool(s) should be used to reach the
  goal?
• How will performance be monitored and enforced?
• What are federal, state and local
  responsibilities?

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To regulate or not to regulate?

• Property rights and common law
• Take the offending party to court and get
  compensated
• Conduct private negotiations
• Problems
• Defining property rights
• Pollution rarely occurs one to one
• Long latency period
• Information asymmetry
• Valuation difficulties

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How much regulation?

• Idealists Zero emissions or zero risk
• Politicians Protect human health with
  adequate/ample margin of safety
• Engineers To the extent technologically possible
  (best technology)
• Economists Where marginal social
  benefit()marginal social cost()
• U.S. POLICY IS A HYBRID OF ALL THESE

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Which policy tool(s)?

• Centralized command and control
• Decentralized market incentives
• Moral suasion
• Direct government provision

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Which policy tool(s)?

• 1. Centralized command and control
• Equal reduction
• Unequal based on affordability
• Specific control technology
• Specific performance
• Least cost (unequal across sources)

9
Which policy tool(s)?

• 2. Decentralized market incentives
• Pollution taxes/effluent charges
• Subsidies (control equipment or emission)
• Tradable permits (allowances, credits)
• Information disclosure (TRI)

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Which policy tool(s)?

• 3. Moral suasion Voluntary programs and
  agreements
• Energy-star
• ISO 14000
• 4. Direct government provision
• public lands
• clean-up
• clean technology RD

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How to monitor and enforce performance?

• Permits for emissions
• Monitoring systems
• self audit
• third party audit
• agency inspection
• Record keeping and reporting regulations
• Monetary fines
• Criminal penalties

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Federal, State and Local Government
Responsibilities

• National environmental policy and regulations
• NEPA
• Regulations for fisheries, wetlands, soil
  conservation, etc.
• State environmental policy and regulations
• NREPA
• Soil conservation, land development, water use
• Local ordinances
• Sediment control
• Littering
• Wetlands protection

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Two Types of Environmental Policies

• Policies that establish an environmental quality
  goal for a particular geographic area (Amount of
  environmental quality to supply)
• Policies that establish the means by which the
  environmental policy goal will be achieved (How
  environmental quality will be supplied)

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Example Air and Water Quality Policies

• Ambient Standard (Goal)
• Implementation Rules (Means)

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Ambient Standards for Air Quality

• Air quality standards
• National ambient air quality standards (NAAQS)
• National emissions standards for hazardous air
  pollutants (NESHAP)-Technology-based emission
  standards

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Criteria Pollutants and NAAQS

• Particulate matter(PM) aggravation of
  respiratory and cardiovascular symptoms, damage
  to lungs, carcinogenic, material damage, soiling,
  visibility
• SO2 aggravation of respiratory and
  cardiovascular symptoms, damage to lungs, acid
  rain, corrosion
• CO vision impairment, loss of work capacity,
  dexterity
• NOx lung irritation, reduced resistance,
  respiratory disease
• Tropospheric Ozone Reduced lung function,
  damage, higher sensitivity, reduced crop yields,
  leaf damage, ecosystem damage
• Lead Kidney and liver damage, nervous system
  damage in children, increased blood pressure and
  heart disease

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Examples of Ambient Air Quality Standards

• Sulfur dioxide SO2 in air
• Annual average daily concentration 80?g/ m3
• 24-hour average concentration 365?g/ m3
• Carbon Monoxide
• 8 hour average concentration 10?g/ m3
• 1 hour average concentration 40?g/ m3

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Ambient Standards for Water Quality

• Water quality standards
• Use designation for all water bodies (e.g.,
  swimable, fishable, boatable, commercial)
• Water quality criteria set to meet the designated
  use
• Numeric concentrations and narrative requirements

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Michigans Water Quality Standards

• Michigans designated uses
• Industrial, agricultural, and public water supply
• Recreation
• Warmwater and coldwater fisheries, other aquatic
  life, and wildlife
• Navigation

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Michigans Water Quality Standards

• Physical characteristics
• Dissolved solids
• pH
• Taste and/or odor producing substances
• Toxic substances
• Radioactive substances
• Plant nutrients
• Microorganisms
• Dissolved oxygen
• Temperature

http//www.epa.gov/ost/standards/wqslibrary/mi/mi_
5_wqs.pdf
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Implementation Policies for Achieving Ambient Air
and Water Quality Standard

• Emissions/Discharge Standard
• Abatement Technology Standard
• Emissions/Discharge Tax
• Marketable Emissions/Discharge Permit
• Input and Output Taxes and Subsidies

Direct policies
Indirect policies
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Economic Question about Ambient Standards
Economic question What is the economically
efficient standard? Answer That point at which
Marginal benefit of abatement (MB) Marginal
cost of abatement (MAC)
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The Efficient Ambient Standard
Efficient Ambient Standard
Demand for abatement (MB)
Supply of abatement (MAC)
?g/ m3 Emitted
Open Access
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Economic Question About Policies for Implementing
Ambient Standards
Economic question What is the most
cost-effective implementation policy? Answer
That policy that achieves efficient standard at
least cost to society
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Uniform Emissions Standard
MAC2
EmissionsStandard
MAC1
Total emissions 10
Total abatement cost 12.522.5 35
Actual Emissions
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Uniform Technology Standard
10
MAC for technology
9
8
7
Total emissions 10
6
MAC
5
Total abatement cost 22.5 22.5 45
4
3
2
1
0
0
1
2
3
4
5
6
7
8
9
10
SO2 Abatement
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Emissions Tax
MAC1
MAC2
Total emissions 10
EmissionsTax
Total abatement cost 18 16 34
Tax paid 24 36 60
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Tradable Emissions Permit

• Government (EPA) decides on total allowable
  emissions
• Issues tradable emission permits
• May sell them or allocate them on some criteria
  (grandfathering)
• Firms are required to have permits for their
  emissions.
• If firms have excess permits because they reduced
  emissions below the allocated permits, they can
  sell excess permits in the market to others who
  could not reduce emissions.

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Example Permits Market

• Assume 2 firms with MAC functions as before.
• Assume each firm currently emits 10 tons
• EPA issues total 10 permits divided equally
  between the two firms (5 each)
• If no trading occurs total cost12.522.535
• How much does it cost for firm 1 to reduce one
  more ton of emissions? say 5.5 avg
• How much does Firm 2 save if it emits one more
  ton say 6.5 avg
• Firm 2 might be willing to buy one permit for
  pricelt6.5 and Firm 1 might be willing to sell 1
  permit for pricegt5.5
• Market results in 10 ton reduction with firm 1
  abating 6 (emitting 4) and firm 2 abating only 4
  (emitting 6) with firm 2 buying one permit from
  firm 1 at a price of approximately 6
• Total (societal) abatement cost 34 (instead of
  35)

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Marketable Permit
MAC2
MAC1
Total emissions 10
Permit Price
Total abatement cost 18 16 34
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Effect of Abatement on Firms Output
S
S'
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When Emissions Cannot Be Monitored

• Tax Outputs of Production
• Higher abatement costs because the only abatement
  alternative is to supply less of the output
• Tax Inputs to Production
• Higher abatement costs because the only abatement
  alternative is to use less of the input

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Negative Externality in Supply of an Output (e.g.
Electricity)
MSC MPC
MSB
MPC
34
Output tax equal to total marginal costs minus
marginal private costs
MSC MPC
MPC
MSB
TAX 2
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Output Tax Amount of the Tax
MSC
MPC
MSB
TAX 2
36
Output Tax Buyer and Seller Prices
MSC
MPC
MSB
Buyers Price 5
Suppliers Price 3
37
Output Tax Government Revenue
MSC
MPC
MSB
Buyers Price 5
Govt Revenue 2 x 2
Suppliers Price 3
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Effect of Input Tax on Supply of an Output
S
S
MSB
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Resource Conservation Policies

• Taxing resource use
• Subsidizing resource conservation