Chapter 16: Incentive Based-Regulation: Practice Flashcards
How has Cap-and-Trade and Pollution Taxes worked in practice?
Lead in Gasoline: First Success
EPA instituted early 1980’s “lead banking” program to reduce complaince costs lead phaseout in gasoline. Widespread participation
- Cost Savings: 10% over CAC approach
- Achieve more stringent lead standards cost-effectively
Reasons for the Success:
- Refiners granted permits based on performance - market power not emerge
- Markets not thin - trading nationwide
- Permits shrinkings, issue of permit life not emerge
- Hot sports not persist
- Monitoring and enforcement good: lead content in gasoline already reported
Chlorofluorocarbons
1988: introduced similar as gasoline legistation
- Also imposed tax: encourage consumers switch substitute products
CFCs successfully phased out of the US
Trading Urban Air Pollutants
- Attempts implement tradable permits at local level: mixed results
Three marketable permit Experiments:
- EPAs Emissions Trading Program
- L.A. Basin’s RECLAIM and mobile emissions trading program
- East coast NOx trading
Trading Urban Air Pollutants
EPAs Emissions Trading Program:
(1976) Allows limited trading of emission reduction credit for five pollutants: Carbon monoxide, sulfur dioxide, particulates, nitrogen oxides
Credits earnned for controlling emissions beyond standard:
- Credits could be traded or banked
Trading Programs:
- Offsets: desgined accommodate siting new pollution sources in non-attainment areas
- Netting Policy: allows trading within single plant
- Buggle Policy: allows trading within limited geographical area
Problem:
- Thin markets greatly reduced effectiveness of emissions trading - Hot-spot problem with non-uniformly mixed pollutants - Increased transaction costs under bubble program
Trading Urban Air Pollutants
RECLAIM: Policy Failure
Regional Clean Air Incentive Market (California): Textbook cap-and-trade for NOx
- Excess supply permits (for political buy-in) lead to slow start 1995
- Required continuous emissions monitorning and electronic reporting
-
Energy Crisis 2002:
- Increased permit prices so much had to cancel cap and trade
- Return to CAC program
- 2005: RECLAIM back on track and second round of cuts sheduled
- 2018: Goals could not be strengthened - program replace with CAC
California’s Clunkers
Stationary sources purchase and scrap high polluting vehicles and obtain pollution credits to avoid clean-air upgrades
- Increases hot sports (environmental justice concerns)
- Strong incentive for fraud
- President Obama took program national as measure stimulate auto sales in face recession
Marketable Permits and Acid Rain
Legislation and Preformance
Acid Rain? Sulfur dioxide and nitrogren oxide transformed while in atmosphere into sulfuric and nitric acid
Problems:
- Damage water and forest resources
- Erosion of buildings, bridges and statues
- Reduce visibility
- Sickness and premature death
Legislation:
1990 Clean Air Act: capped emissions at 1986 levels, required >60% cuts by 2000.
Permits given away freely - based historical pollution levels
- Broad, nationwide ⇒ prevent market power
- Uniformly mixed → no hot-spots
- Industry expected ten years worth of trading
- Required continuous monitoring
- PRovided retaining programs for job losses
Preformance:
- Emissions fell sharly
- Ambient levels declined
Based on health benefits: passed efficiency test
(Surprise) Dramatic cost savings.
- Cost: $1 billion/year (forecast of $4 billion)
Why?
- Not: Short run cost-effectiveness inter-firm trading
- Yes: “long-run” changes in technology
Most firms switched low sulfur coal or developed new fuel blending techquines rather than installing expensive scrubbers
What is offset?
Offset: Reduction greenhouse gasses achieved offsite 3rd parties and then packaged and sold.
Must be additional: Project (reforestation, reduction in fugitive emissions) not already occured under business as usual
Europe: European Trading System
- Continent-wide Cap and trade (Kyoto Complaince)
- Allows for offset trading w developing countries as part of Clean Development Mechanism
- Concerns about monitoring and enforcement
- Prices consistently been low, indicating emissions shrinking within cap
Pollution Taxes in the US
Some manicipalities use *“Unit pricing” instead of lump sum free, to reduce waste flows
One study found that unit pricing:
- Reduce generated waste by 10%
- Reduced waste flow to landfills by 30%
- Reduce waste management costs by 10%
- Communities increased curbside recycling
Pollution Taxes outside of the US
- BC and several European countries have carbon tax
- Germany, France, Netherlands ⇒ instituted effluent charges for water pollution
📎 Effluent Tax Systems: Grafted on to CAC system, mandates standards and control technologies
Lessons from Europe:
Taxes introduced low level and slowly raised
Real value taxes not been eroded inflation
- Direct funds raised into investment in improving water quality
Effluent Tax Systems
📎 Effluent Tax Systems: Grafted on to CAC system, mandates standards and control technologies
Indirect Pollution Taxes:
Ex: rather than tax water pollution runoff from farms, tax pesticides are input into the farm
- Can generate counterproductive results: pesticide tax might discourage new products entering market
- Potential uninteded preverse effects → direct tax on pollution is prefered to indirect tax
Direct pollution tax more theoretically appealing, but indirect tax often more feasible
Other incentive-based tools:
- User fees for public lands
- Environemntal bonds
- Insurance and liability requirements
- Energy taxes
