Pollution Instruments Flashcards
What is the least cost theorem of pollution control?
Cost efficient and cost effective pollution control instruments achieves abatement at the least cost. Abatement at the least cost needs the marginal cost of abatement to be equalised for all abaters.
Name the three main types of PCI’s
- Institutional approaches to faciliate internalisation of activities
- Command and control instruments
- Economic incentive (market based) instruments
When is an instrument cost effective?
If an instrument can obtain the abatement target at a lower real cost than any other can. It involves allocating the smallest amount of resources to achieve a given target.
What is the problem faced by the government to meet that target level of abatement Z at least cost?
min: C(A) +C(B)
st: Z(A) +Z(B) = Z
The solution to this problem yields the result that the marginal cost of abatement be equalised across all abaters. The marginal cost for both firms is equal to mu known as the shadow price of constraint. The shadow price of constraint gives the impact on the minimised TOTAL cost of abatement of a small relaxation of the target level of abatement.
What is a potential disadvantage of equalised marginal abatement across all abaters?
A least cost solution will in general not involve equal abatement effort by all polluters. Where abatement costs differ cost efficiency implies that relatively low cost abaters will undertake most of the total abatement effort.
Explain the different insitutional approaches to facilitate internalisation of externalities.
I) Facilitation of bargaining - Cost of bargaining is reduced assigning property rights. Bargaining is feasible only when few people are involved. Bargaining between current and future generations cannot really occur.
II) Specification of liability - Codification of liability for environmental damage. Liability for damages caused could be an incentive that induces the potential injurer to unertake the efficient level of precaution. Difficult to implement where damage become apparent only long time after the relevant pollutants were discharged
III) Development of social responsibility - Education and socialisation programmes promoting citizenship. It can be a powerful means to ahieve environmental goals
Command and control instruments are the dominant method of reducing pollution. Name the different instrument categories of command and control instruments.
- Technology control
- Emissions licenses
- Location control (zoning, planning controls, relocation)
Explain the use of technology controls as a command and control instrument
Minimum technology requirements are imposed upon potential polluters. Sometimes specific tenchiques such as flue-gas de-sulphurization are mandated.
Examples include best practicable means (BPM), best available technology (BAT) and best available technology not entailing excessive cost (BATNEEC).
The instruments are not usually cost efficient because they do not focus the abatement effort on the polluters that can abate at least cost. The inefficiency stems from that any decision about how to reduce emissions is decided centrally an environmental agency (such as the EPA), rather than decentralised to the firms.
However they do achieve large reductions in emissions quickly, particularly when technological solutions are available but not widely adopted.
Explain the use of non transferrable emissions licenses as a command and control instrument
The EPA creates licenses (or permits/quotas) for a particular pollutant which it then distributes to emission sources. The licenses are non transferrable meaning each firms initial allocation is the maximum amount of emissions that it is allowed.
Disadvantages to the functioning of non transferrable emissions licenses occur if polluters believe that their actions are not observed or if the cost of abatement is relatively lower than the cost of penalty. Solutions to this include monitoring and penalties to non compliance.
Although possible under special conditions, why would the utilisation of license emissions not achieve the emissions target at the least cost?
Because cost efficiency requires the marginal cost of abatement to be equal across all abaters, the costs for the EPA of collecting each polluters abatement cost function could be prohibitive and may outweight the potential efficiency gains. Those who have the information have no incentive to provide this to the regulators in an unbiased form.
Explain the use of location controls as a command and control instrument
Pollution control objectives could be met by separating the location of people an pollution sources.
Note that this is only relevant where the pollutant is not uniformly mixing. Uniformly mixing pollutants are dispersed quickly and there spatial dispersion is uniform (e.g. GHG). Non uniformly mixing pollutants spacial distribution is not uniform (e.g. ozone accumulation in lower atmosphere, oxides of nitrogen and sulphur in urban airsheds)
Name the different categories of economic based (market incentive) instruments
i.
a) Emissions charges/taxes
b) User charges/fees/natural resource taxes
c) Product charges/taxes
ii.
a) Emissions abatement and resource management subsidies
b) Deposit refund systems
c) Liability payments
iii)
a) Marketable emissions permits - ERC’s or cap and trade
How do incentive based systems work?
Incentive based systems work by altering the structure of pay-offs that agents face, thereby creating incentives for individuals or firms to voluntarily change their behaviour.
What is a Pigouvian tax and how do we obtain its value?
A Pigouvian tax is a tax that is set on any market activities that generate negative externalities.
To solve for the tax problem we attain the efficient level of pollution where MB=MD. The result is the value of the shadow price of pollution externality. This is the rate at which the tax (or subsidy) should be applier per unit of emissions. Once the tax is operative the polluter will maximise benefits at M*, where the post tax marginal benefits of additional pollution is zero.
Explain firms choice of total abatement with reference to their marginal abatement benefits/costs
Since the tax rate is constant, the marginal benefit of abatement for a firm is horizontal in the abscence of a tax and coincides with the z axis. Wwhen a tax is levied an incentive to abate exists in the form of a tax levied.
This means it will be profitable for firms to reduce pollution as long as the value of the marginal cost of abatement is less than the value of the tax rate per unit of pollution. The resultant value is Z* = M(x)-M*; the efficient level of abatement.
