ERE11: Instruments of Environmental Policy

1
ERE11 Instruments of Environmental Policy

• Criteria, incl. cost-effectiveness
• Instruments
• Institutional
• Command and control
• Market based
• A comparison

2
Criteria

• Cost-effectiveness
• Dependability, environmental effectiveness
• Information requirements
• Enforceability
• Long-run effects
• Dynamic efficiency
• Flexibility
• Equity
• Uncertainty

3
Cost-effectiveness

• Marginal costs are equal for all producers

4
Instruments Overview

• Institutional
• Bargaining
• Legal redress
• Information, awareness, responsibility
• Property rights
• Voluntary agreements
• Command and control
• Inputs, technology
• Output (product, pollutant)
• Location (source, individual)
• Timing
• Prohibition
• Market-based
• Taxes (inputs, outputs)
• Subsidies
• Tradeable permits

5
Institutional Instruments

• Coase (1960) Theorem The social optimum can be
  established through bargaining between polluter
  and victim
• Alternatively, the court may step in
• Or, the government may appeal to the polluters
  conscience
• Or, the government may establish property rights

6
Command and Control

• Command and control direct regulation
• It is the most common form of environmental
  regulation, reflecting a natural science frame of
  mind, and highly successful in past management of
  point sources of toxics
• Essentially, command and control prescribes
  aspects of the production process, be it inputs,
  production or outputs
• Requires substantial knowledge on the part of the
  regulator
• Requires homogenous producers

7
Types of Direct Regulation

• Inputs, e.g., fuel efficiency
• Technology, e.g., catalytic convertors
• Best practible means
• Best available technology (not exceeding
  excessive costs)
• Outputs
• Products, e.g., carcinogenic toys
• Waste, e.g., sulphur emissions
• Timing, e.g., air traffic
• Location, e.g., nature reserves
• Prohibition, e.g., CFCs

8
Taxes and Subsidies

• Taxes Pay a charge or levy or penalty for every
  unit consumed, produced or emitted
• Subsidies Receive a premium for every unit not
  consumed, produced or emitted
• Uniform taxes and subsidies have a uniform effect
  on marginal production costs, thus ensuring
  efficiency
• Taxes and subsidies have an equivalent effect on
  emissions in the short run, but have different
  budgetary distributional, and long-term effects

9
Tradeable Permits

• The government sets an overall target on
  consumption, production or, most common, emission
• Each producer obtains a certain amount of
  emission permits, can sell these, or buy more at
  the market place
• If the permit market is perfect, all producers
  pay the same price, and marginal costs of
  production increase uniformly
• Taxes and tradeable permits are equivalent
  provided that the regulator knows all marginal
  abatement costs

10
Permits Initial Allocation

• Grandfathering
• Give permits to current polluters
• Politically easy, as confirms status quo
• Auctioning
• Sell permits to highest bidder
• Generates revenue, perhaps a lot
• To victim
• Perhaps fair, definitely complicated
• May generate large transfers
• Per capita
• Perhaps fair, relatively easy
• May generate large transfers

11
Voluntary Agreements

• Enviromental regulation requires a lot of
  knowledge, perhaps more so than at the disposal
  of the regulator
• Increasingly, governments and industry negotiate
  over emission targets, the results of which are
  laid down in a voluntary agreement
• This is a euphemism, as the government typically
  threatens to intervene if no voluntary agreement
  is used
• Voluntary agreements make optimal use of the
  information within industry but have a problem
  with public acceptability

12
Cost-Effectiveness

• Market-based instruments are cost-effective
• Command and control is unlike to be
  cost-effective, unless the regulator knows a lot
  and the industry is homogenous
• Institutional instruments may be cost-effective
  (voluntary agreements), and even efficient
  (bargaining, property rights)
• Tradeable permits may also be efficient, if
  people buy (hold) but not use (sell) permits

13
Cost-effectiveness (2)
14
Environmental Effectiveness

• The environmental effect of taxes and subsidies
  is uncertain (but its marginal costs are certain)
• The environmental effect of tradeable permits is
  certain (but its costs are uncertain)
• The environmental effects of emission standards
  are certain (bar illegal dumping), of input and
  production standards less certain
• The environmental effects of institutional
  instruments are uncertain, and unpredictable as
  enforcement is not in the hands of the government

15
Dynamic Effects

• Taxes and tradeable permits provide a continuous
  incentive to emit less
• Subsidies have the same effect, but may attract
  new entrants
• Direct regulation is static once the standard is
  met, there is no need to further reduce emissions
• Unless, standards get stricter over time
• Institutional instruments are mixed

16
Flexibility

• Flexibility is important, as new information may
  arise
• It is easy to lower taxes, make standards less
  strict it is hard to do the opposite
• The exception is tradeable permits, where the
  government can release new permits but also buy
  existing ones

17
Equity

• Different instruments have different
  distributional consequences
• In general, environmental policy makes things
  more expensive with cost-effective instruments,
  this effect and hence the distributional effects
  are less pronounced
• If necessary (luxury) goods are regulated, the
  environmental policy is regressive (progressive)
• Tradeable permits have as advantage that
  cost-effectiveness is secured by the market, and
  equity perhaps by the initial allocation

18
Uncertainty

• Overregulation is more (less) costly with taxes
  than with standards if the marginal damage cost
  curve is steeper (flatter) than the marginal
  abatement cost curve