Correcting Environmental Damages

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Correcting Environmental Damages

• All environmental resource uses must be valued so
  that damages can be estimated.
• Costs (damages) must be internalized on
  responsible parties.

2
Correcting Environmental Damages (cont.)

• More complicated than the simple story of the
  nursery and rancher
• Many polluters, some non-point sources
• Urban runoff, sewage spills, many point sources,
  ...
• Many uses (values) of resources
• Households, manufacturing, recreation, ecological
  services, aesthetic benefits,...
• Difficult to value non-market nature of
  environmental resources.

3
Correcting Environmental Damage (cont.)

• Some policy criteria
• Internalize costs on responsible parties
  (upstream)
• Provide incentives to change problem behavior
• Efficient, cost-effective pollution reductions
• Incentives for polluters to find better ways to
  reduce impacts
• Ability to enforce and monitor
• Fairness

4
Correcting Environmental Damage (cont.)

• Individual-based policies
• Liability laws and compensation
• Induces would-be polluters to make careful
  decisions, internalize costs in their actions.
• Examples
• Surfers vs. city for liability of sewage spill.
• Fishery vs. firm that dumps toxins in river
• Comprehensive Environ. Response, Compensation,
  and Liability Act of 1980
• Measure and recover expected costs of oils spills

5
Correcting Environmental Damage (cont.)

• Individual-based policies (cont.)
• Property rights and exchanges
• Users purchase resource rights from one another,
  resource flows to its highest-valued use
• Incentive to maximize resources value
• Problems
• Ill-defined property rights
• Potentially high negotiation/transaction costs
• Free-riders may benefit but are not compelled to
  contribute
• Equity considerations and distributional effects

6
Correcting Environmental Damage (cont.)

• Command-control policies (regulations)
• Emission Standards
• Allow certain amount of emissions
• Technology Standards
• Establish certain designs or engineering
  practices.
• Examples Detention basins, storm water permitting

7

• Command-control policies (cont)
• Problems
• Set through complicated political/administrative
  processes
• Sometimes set without considering abatement costs
• Often do not directly relate problem activities
  with abatement costs, thus less incentive to
  change behavior.
• Once achieved, no incentive to improve
• e.g., establish minimum runoff requirement and
  nothing else, even if costs modest

8

• Command-control policies (cont)
• Problems (cont.)
• Uniform standards tend not to minimize overall
  abatement costs
• Better to have high abatement cost parties
  pollute more than low abatement cost parties.
• Positives
• Lower monitoring costs
• Useful if efficient emission level at or near
  zero.
• Emergencies or events changing emissions and
  damages (e.g., smog alerts, etc.)

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Correcting Environmental Damage (cont.)

• Incentive-based policies
• Taxing production or activities that contaminate
  the watershed
• Direct incentive to internalize damages, reduce
  pollution
• e.g., taxing urban development, agricultural
  fertilizers, household pesticides, ...

10

• Incentive-based policies (cont.)
• Emission fees
• Force parties to pay for using the resource in
  direct relation to their actions, incentives to
  economize use.
• Incentives to search out cost-effective ways to
  reduce emissions, recycle, treat waste.
• e.g., municipal urban-runoff fee,
  household-runoff fee.

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Correcting Environmental Damage (cont.)

• Incentive-based policies (cont.)
• Problems with emission fees
• Polluters must be identifiable difficult with
  non-point sources.
• Instead, can place fees on problem-causing
  materials (e.g., fertilizers, pesticides, etc.,
  ...)
• Requires effective monitoring, but often with
  fewer costs on regulatory authorities and more on
  polluters.

12
Correcting Environmental Damage (cont.)

• Incentive-based policies (cont.)
• Abatement subsidies (on emission reductions)
• Pay polluters to reduce emissions, so polluting
  comes at a cost.
• Similar incentives to emission fees, but subsidy
  raises revenues that can attract new firms into
  industry.
• Individual firm emissions decrease, but more
  firms in the industry.

13
Correcting Environmental Damage (cont.)

• Incentive-based policies (cont.)
• Abatement-Technology subsidies
• Subsidize things like catch basins, filter
  systems, re-usable water systems or water
  harvesting in households (solar energy,
  energy-efficient appliances.)

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Correcting Environmental Damage (cont.)

• Incentive-based policies (cont.)
• Deposit Refunds
• Like paying upfront tax, then rewarded for
  recycling
• Bonding System
• Potential polluter pays into escrow account,
  returned if environment undamaged
• Pollution Subsidies
• Paid for each pollution unit reduced

15
Correcting Environmental Damage (cont.)

• Incentive-based policies (cont.)
• Marketable (transferable) pollution permits
• Authority sets total emission level, distributes
  permits (credits) voluntarily traded among
  parties.
• High-cost abatement parties have higher value on
  pollution rights so buy rights from low-cost
  parties.

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• Incentive-based policies (cont.)
• Marketable (transferable) pollution permits
  (cont.)
• More cost effective then standards
• Reduces overall abatement costs.
• Compliance is important, but incentives exist to
  self-monitor.
• Problems
• How to initially distribute permits?
• Markets for permits must be competitive.
• Transfer rules must be clear and easy to follow.
• Can create hotspots of pollution.
• Case Studies Fox River (Wisconsin), Dillon
  Reservoir (Col.), Alemarle-Pamlico estuary (N.
  Carol.)

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Cost ComparisonStandards vs. Transferable
Credits

• 2 firms each discharge 2 pollutant units (4
  total) with abatement costs as below.
• Authorities want to reduce pollutants to a total
  of 2 units.

18

• Agency can reduce pollutants to 2 units by
  requiring each firm to reduce 1 pollutant unit.
• Total Abatement Costs 80 (10 70)

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• Now agency gives each firm 1 permit to discharge
  1 unit, and permits can be traded
• If firm Y offers X more than 30, then X would
  sell a permit to Y

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• Firm Y buys permit and discharges 2 units
• Firm X now eliminates 2 units of pollutants
• Total Abatement Costs 40
• With many firms, market for permits develops

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EPA Principles for Trading

• Must comply with Clean Water Act.
• Trades must mesh with local, state, fed. water
  quality requirements.
• Must be developed with EPA framework (TMDL)
• Trades restricted to watershed boundaries.
• System to monitor water quality trading
  results.
• Problems of trades with more than one pollutant.
• Stakeholder involvement, public input essential.

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Summary

• No single best policy for every problem.
• Incentive-based policies induce people to think
  about consequences, economize on using resources,
  find cheaper ways to abate.
• Command-control policies mandate certain behavior
  with regulation and enforcement. Often complex
  and not always the most cost-effective pollution
  control.