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Chapter 5 Slides

The document discusses four approaches to pollution control: emission standards, Pigovian taxes, tradeable pollution permits, and technology-based regulations. It analyzes emission standards and their advantages of specifying desired results for public health hazards. However, emission standards are inflexible and do not incentivize firms to reduce pollution below standards. The document also discusses how pollution taxes can more efficiently reduce pollution by giving firms flexibility. Setting the optimal tax rate requires full information about marginal costs of pollution control.

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54 views

Chapter 5 Slides

The document discusses four approaches to pollution control: emission standards, Pigovian taxes, tradeable pollution permits, and technology-based regulations. It analyzes emission standards and their advantages of specifying desired results for public health hazards. However, emission standards are inflexible and do not incentivize firms to reduce pollution below standards. The document also discusses how pollution taxes can more efficiently reduce pollution by giving firms flexibility. Setting the optimal tax rate requires full information about marginal costs of pollution control.

Uploaded by

ak
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 5

The Economics of Environmental


Regulations
Pollution Control Policy
• There are four basic approaches to pollution
control:

• 1. Emission standards (command-and-control


system): standards that require all firms to
pollute below maximum allowable levels or
reduce pollution to a certain percent.

• 2. Pigovian taxes (or effluent charges): a tax or


fee per unit of pollution imposed on polluters by
government authorities.
Pollution Control Policy
• There are four basic approaches to pollution
control:

• 3. Tradeable pollution permits: permits all firms to


emit only the level of pollution for which they have
permits. Tradability implies that firms can buy or sell
these permits (with low-emitting firms able to sell
extra permits and high-emitting firms able to
purchase additional permits.

• 4. Technology-based regulations: these include


requirements that all firms use a certain type of
technology or install specific equipment.
Which Control Policy is Best?
• There is no universal answer.

• Different approaches may be preferable in different


circumstances – usually a combination is used.

• We are going to look at the approaches specifically


from an economic analysis perspective.

• The analysis may not measure all the relevant costs


because of synergistic effects that can occur when
– multiple pollutants affect an ecosystem and when
– the subtle effects of persistent pollutions are poorly
understand.
Emission Standards
• A common approach to reducing pollution by
government departments such as the EPA, Environment
and Climate Change Canada, Transport Canada, etc.

• Ex. Cars must meet certain standards for tailpipe


emissions

• Advantage: standard can specify a definite desired


results, which is particularly important in the case of a
substance that poses a clear hazard to public health.

• In extreme case (such as with DDT and CFCs) the standard


is simply a ban on the substance’s use.
Who Likes Emission Standards?
• Environmentalists like command-and control approaches
because
– they adhere to the polluter-pays principle, so there is a moral
appeal
– Emission standards tend to achieve their objective quickly and
with greater certainty

• Economists have reservations because regulations require


administrative and enforcement costs (i.e. transaction
costs), are not economically efficient

• Have the potential to be used unjustly as barriers to entry,


and regulators may be influenced by lobbyists and politics
(see video links on the following slides)
Emission Standards
• Additional Disadvantages:
• 1. Problem of inflexibility – fixed standards work well
when pollution-generating firms are relatively
similar, such as different models of automobiles.

• But what about an industry with many plants of


different sizes and ages?

• Requiring all firms or products to meet the same


standard is normally not cost-effective. It is cheaper
for firms that can reduce pollution at a low MC to
reduce pollution more than firms that have a high
MC of reduction.
Emission Standards
• Disadvantages:
• 2. Firms have little incentive to reduce pollution further (once the standard has
been met).
• Ex. The motor vehicle fuel economy program in the U.S., known as CAFE
(Corporate Average Fuel Economy) – see next slide

• 3.Unintended effect may be to discourage investment in new and improved


pollution-control technologies.

• The Politics of CAFE:


https://www.theatlantic.com/science/archive/2018/06/how-the-carmakers-
trumped-themselves/562400/
• Reducing regulations: https://www.youtube.com/watch?v=8azKW5g-8LM
• The effect of policies on other markets (e.g. electric cars):
https://www.youtube.com/watch?v=L8MJ6XEofP8
The Ideal Emission Standard

1. In the absence of a
3. Without full standard, the amount of
information, waste emitted may (will)
authorities may set reach 300 units.
the emission
standard at 100
units – this would
anger polluters and
result in opposition,
even court
2. With full information, authorities
challenges.
would set the emission standard at
150 units – the optimal level of
pollution.
The Cost Effectiveness of Uniform Emission
3. With a Control 1. Assume 2
steeper
firms with
MCC curve,
different
firm#2’s
MCCs.
cost is
Emission
K+N+L.
controls are
Firm#1’s
applied
cost is M.
equally and
4. But, if the standard
control was is set to 200.
set at 75
units for 2. Each firm
firm#1, its is
cost would responsible
be L+M. for 100 units
And if of control.
control was Total waste
set at 125 control cost
units for 5. Thus, a non-uniform for firms 1
firm#2, its policy is less costly than and 2 are
cost would a uniform policy. K+N+L+M.
be K.
Effluent Charges/Pollution Taxes
• Referenced in the video lecture
Effluent Charges/Pollution Taxes
Carbon Tax and Tax Incidence
Carbon Tax vs Sales Tax
• While a carbon tax, when applies to the sale of a final
good or services such as gasoline (“at the pump”),
seems to act as a sales tax, it is, in fact, not a sales
tax.
• Payroll taxes, for instance, are also applied at the
point of sale of labour.
• The purpose of the carbon tax is quite different from
the purpose of a sales tax. A sales tax is levied on
(almost) all goods and services, thereby increasing
the price of those goods and services in the same
manner, say, by 7%, with the objective of generating
government revenue.
• A carbon tax, like a sin tax, or more generally, an
excise tax, is levied on carbon only and increases the
price of goods in different ways with the objective of
changing the consumption patterns of consumers.
Carbon-intensive goods will see their price increase
by a greater amount than less carbon-intensive goods
or services.
• Of course, carbon taxes also raise revenue, but that,
in itself, does not mean they are sales taxes.
Setting the Carbon Tax Rate
• Referenced in the video lecture

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