Lecture 2: Policy instruments 1

Question 1

Policies to address problems associated with fuel use should:
1.
2.
3.

Answer 1

1. Be effective: exploit all opportunity for reducing env. harm/mobilize private investment in clean tech.
2. Be cost-efficient
3. Strike the right balance between benefits and costs of env. improvement for the economy (-> maximising the net benefit).

Question 2

What are the objectives of fiscal instruments?

Answer 2

• They may reduce env. harm
• They may produce revenue gain, which can be used to reduce other taxes that distort economic activity.
• They may then achieve env. protection at lowest overall cost to the economy.
• If fiscal instruments are scaled to reflect env. damage, they avoid either excessively burdening the economy, or, conversely, forgoing socially worthwhile env. improvements.

Question 3

What are fiscal instruments?

Answer 3

Tools and policies that the government uses to manage their finances, economic activity in the form of fe: taxes, subsidies or government spending.

Question 4

What do correct taxes do?

Answer 4

They are prices that reflect the true cost to society -> they improve economic efficiency by addressing a market failure.

Question 5

Which basic 3 components should energy tax systems comprise?

Answer 5

1. A charge should be levied on fossil fuels in proportion to their CO2 emissions multiplies by the global damage for those emissions.
2. Additional charges should be levied on fuels used in power generation in proportion to the local air pollution emissions from these fuels but with credits for clean energy, given that the net emissions released are what ultimately determine env. damages.
3. Additional charges should be levied for local air pollution, accidents, pavement damage attributable to motor vehicles -> preferably according to distance driven (reflecting ALL costs of driving a motor vehicle).

Question 6

Why is coal use pervasively undercharged?

Answer 6

• Not only for carbon emissions, but also for health costs of local air pollution.
• Correct taxes can yield substantial reduction in pollution-related deaths and in CO2 emissions.

Question 7

What is a sink function?

Answer 7

The ability of natural environments to absorb wastes and pollution.

Question 8

What is the optimal level of pollution?

Answer 8

The pollution level that maximises net social benefits.

Question 9

What is the only way to achieve 0 emission and why is this not feasible?

Answer 9

To have 0 production, an optimal level of production is one where externalities are fully internalised. Resulting in a lower level of production and pollution.

Question 10

What is Qmax?

Answer 10

When the polluting party is unregulated, the firm has no incentive to take steps back to reduce their emissions.

Question 11

What will happen when pollution levels are reduced closer to zero?

Answer 11

Then the cost of additional pollution reduction will rise. -> marginal cost will rise.

Question 12

What will happen to the marginal damage of pollution as the level of pollution rises?

Answer 12

It will start small and will grow as the level of pollution rises.

Question 13

What is the status at Qmax? (MD/cost)

Answer 13

• Marginal damage of pollution is high
• Cost to reduce pollution is low.

Question 14

What is a pollution standard?

Answer 14

A regulation that mandates firms to meet a specific pollution level or pollution reduction

Question 15

What is a pollution permit?

Answer 15

Permit that allows a firm to emit a certain quantity of pollution - tradable

Question 16

What is a technology based regulation?

Answer 16

it requires firms to implement specific technology or install specific equipment.

Question 17

What are disadvantages of a pollution standard?

Answer 17

• Inflexible: fixed standard
• Requires all firms to meet the same standard - not cost efficient
• After firms have met their standard, they have little incentive to further reduce pollution.

Question 18

What are advantages of technology based approach he’s?

Answer 18

• Enforcement and monitoring costs are relatively low
• These approaches do take costs into consideration
• The mandated BACT can change over time as technologies improve
• Cost efficient due to standardization: if all firms must adopt a technology, drives the costs of producing that technology down - becomes cheaper.

Question 19

What are downsides to technologie based standards?

Answer 19

• They are unlikely to be cost-efficient because they do not provide firms with the flexibility to pursue a range of options.
• BACT regulation may create little incentive for innovation
• Implementation of BACT costs will vary among firms
• Economically not efficient.

Question 20

What are advantages of a pollution tax?

Answer 20

• The regulation creates a strong incentive for action
• Internalisation of external costs
• Economically efficient

Question 21

What are downsides to a pollution tax?

Answer 21

• Individual firms are not required to reduce pollution under a market based approach
• Very difficult to predict the total amount of reduction that a given tax will produce
• It depends on the shape of each firms MCR curve, which is usually not known to policy makers.

Question 22

What is market-based pollution control?

Answer 22

Pollution regulations based on market forces without specific control of firm-level decisions (such as taxes, subsidies and permit systems).

Question 23

What is MCR?

Answer 23

Marginal cost of reduction: When a firms moves further from Qmax and reduces its pollution, more additional costs are needed.

Question 24

Which 4 ways are there to control pollution?

Answer 24

• Pigovian tax
• Transferable pollution permits
• Pollution standards
• Technology-based regulations

Question 25

What is the total sum of a firms pollution tax?

Answer 25

Tax payments + SUM of reduction costs

Question 26

What is the big difference between tax and tech based appoaches?

Answer 26

Unlike standards and technology-based approaches, pollution taxes are thus economically efficient.

Question 27

What is the best way to achieve a specific target, while also achieving economic efficiency?

Answer 27

T set up a system of tradable pollution permits - fully tradable - the total volume of pollution emitted by all firms cannot exceed the maximum amount set by the total number of permits.

Question 28

What are advantages of a tradable pollution permit?

Answer 28

• Combines advantages of direct regulation and an emission tax
• Allows policy makers to set a definite limit on total pollution levels, while using market process to seek an efficient method of achieving the goal
• Pollution control can be tightened over time by reducing the overall number of permits issued.
• Firms will benefit by purchasing permits whenever the permit price is below their marginal reduction costs or selling permits whenever price exceeds these costs.
• Possible for private groups to buy permits so that pollution is reduced.

Question 29

Which approach would work for local/regional/global pollutant?

Answer 29

• Technology based: local pollutant,
• Market based policies work better in the case of regional and global pollutants (fe: tax or permits).

Question 30

What are non-uniformally mixed pollutants?

Answer 30

Pollutants that cause different impacts in different areas, depending on where they are emitted (fe:lead). - create hotspots (high levels)

Question 31

What are flow pollutants?

Answer 31

They have a short-term impact and then dissipate or are absorbed into the environment.

Question 32

Which are market based pollution control instruments?

Answer 32

They create a market -> pollution taxes + tradable pollution permits. Taxes create a financial incentive for firms to reduce their emissions.

Question 33

When is a market mechanism effective on a pollutant?

Answer 33

A market mechanism is generally more effective for pollutants that are uniformly mixed at a regional level, as this allows for the establishment of a market where pollution permits can be traded. The effectiveness of market mechanisms decreases when dealing with nonuniformly mixed pollutants, especially at the local level, where the impact is more concentrated and localized.

Question 34

What is the optimal level of pollution?

Answer 34

According to the equimarginal principle where the optimal level of pollution is reached when the marginal cost of reducing pollution is equal to the marginal benefit of reducing it.

Question 35

Which are forms of market failures?

Answer 35

Externalities, public goods, non-perfect competition, incomplete property rights, transaction costs

Question 36

What are economic selection criteria for policy instruments?

Answer 36

• Effectiveness
• Efficiency/cost-efficiency
• Equity/fairness
• Cost recovery
• Administrative complexity
• Enforceability (monitoring)
• Does the polluter pays
• Indirect effects (employment)
• feasibility
• Acceptability

Question 37

Which 4 types of policy instruments are there?

Answer 37

• Command & control
• Communication
• Economic (market-based)
• Other instruments

Question 38

What are command & control policy instruments?

Answer 38

Emission standards, production/technology standards, product standards, bans/quotas

Question 39

What are communication policy instruments?

Answer 39

Certification/label, eduction, voluntary action/convenants

Question 40

What are economic (market-based) policy instruments?

Answer 40

Taxes, subsidies, tradable permits, take-back schemes (deposit refunds)

Question 41

What are other policy instruments?

Answer 41

Government procurement, public R&D, negotiation, corporate social responsibility, community based management

Question 42

Why is command and control inefficient?

Answer 42

• Mitigation costs may vary across firms for efficiency, forms that have lower mitigation costs should mitigate more
• No incentive to reduce emissions below standard

Question 43

What is MMC

Answer 43

Marginal mitigation costs