Title: Topics in Environmental Economics: Taxes, Emissions Trading, and Other Topics in the Economics of Pollution
1Topics in Environmental Economics Taxes,
Emissions Trading, and Other Topics in the
Economics of Pollution
- Guest Lecturer Hans Zigmund
- DePaul University
- PPS 329/359 Special Topics Applied Urban and
Environmental Economics
2Purpose
- To provide students with the tools of economic
theory for analyzing environmental issues from an
economic perspective. - To that end this lecture will be largely
theoretical with relevant applications in the
second half of the talk.
3Outline
- Macroeconomics (Growth Theory)
- Microeconomics Theory
- Utopian Capitalist View
- Cost Benefit Analysis
- Adjustments at the Margin (Taxes, Subsidies, and
Markets) - Microeconomics applied to policy
- Kyoto Protocol
- European Union Emission Trading Scheme (ETS)
- Alternative International Agreements
- Boulder Carbon Tax
4Economic Growth
- Increase GDP/Capita (Economic Output)
- Factors of production
- Land (L)
- Labor (N)
- Capital (K)
- Economic output requires the exploitation of
natural resources.
5Areas of Government Intervention
- Reduce Pollution (Todays area of focus)
- Reduce Depletion of Natural Resources
- Manage Public Lands
- Compensation from Natural Disasters
6Environmental Perspective on GDP
- Focus of economic growth is on increasing
GDP/capita. - Hides negative impact on ecosphere of producing
goods and services. - Pollution related healthcare costs
- Exxon Valdez clean up 2.2bn
7Environmental Perspective on GDP
- GDP does not account for the degradation of
natural resources. - Erosion
- Water Pollution
- Exhausting Mineral Resources
- Depleting Fisheries (until possibly too late)
8Environmental Perspective on GDP
- Hides negative or underestimates some positive
effects. - Energy efficient light bulbs and appliances.
- Fuel efficient cars.
9Index of Sustainable Economic Welfare (ISEW) and
Genuine Progress Indictor (GPI)
- Created by Herman E Daly and John Cobb Jr. (1989)
and Philip Lawn (2003) - Adjusts GDP/capita for
- Income Distribution
- Depletion of natural resources
- Loss of wetlands
- Loss of farmland from soil erosion and
urbanization. - Cost of air and water pollution
- Estimate of long term cost of global warming.
10Utopian Capitalist View Pareto Optimality
- Edgeworth Box
- Exhausting Gains On Trade
- Conditions of Pareto Optimality
- You cannot make one party better off without
making another worse off. - Parties involved in exchange bear the full true
cost of the transaction.(no externalities)
11Cost Benefit Analysis Pollution Abatement
- Seek out the point that minimizes both the cost
of abatement and environmental damage costs (or
maximize environmental benefit). - Total Cost curve is minimized at the point of
intersection. - 1 in abatement cost 1 in damage cost control
or environmental benefit.
12Cost Benefit Analysis Pollution Abatement
TC
Damage Cost
Socially optimum amount of pollution abatement
Abatement Cost (Environmental Benefit)
13Cost Benefit Analysis Pollution Abatement
- On the right side, spend too little leads to high
environmental costs. - On the left side, spend too much and it trade
offs will have to be made with other social
programs such as public health.
14Regulatory Approach
- Historically the regulatory approach has been
effective. - Example
- Automobile emissions and MPG standards.
- Leads to reductions in Carbon Monoxide emissions
and other pollutants. - Is the regulatory approach the most efficient?
15Regulatory Approach
- Two Firm Model
- Marginal Cost/Marginal Benefit and
inefficiencies. - Because hypothetical firm A and firm B to abate
the same quantity under different marginal cost
structures, firm A may abate in excess of
marginal benefit while firm B may abate less than
optimal.
16Regulatory Approach
MCA
MCB
I
Damage Per Unit
II
QR
QeA
QeB
17Regulatory Approach
- Area I represents abatement cost in excess of
benefits for firm A. - Area II represents opportunity cost loss of firm
B for stopping abatement while marginal benefits
were still greater than marginal costs.
18Adjustments at the Margin Pollution Taxes
- In efficient markets P MC.
- True only when firms marginal cost equals the
real cost of the next unit of production. - If pollution create costs on society not incurred
by business (externality), then an over
allocation of resources into production will
occur. - Taxes can correct for this over allocation by
internalizing the externality.
19Adjustments at the Margin Pollution Taxes
P
MCt
Spillover costs
MC
P0
Pe
D
TAX
Overallocation Corrected
Q
0
Qe
Q0
20Adjustments at the Margin Subsidies
- RD that leads to reduction in pollution has
positive societal benefits. - RD will only be invested in if profitable.
- Subsidizing RD can reduce the time it takes to
develop new technology. - RD doesnt always generate a outcome on the
income statement. The subsidy helps offset the
risk of investment.
21Adjustments at the Margin Subsidies
P
RD Subsidy to producers Decreases marginal cost
MC
Pe
MCs
P0
D
Underallocation Corrected
Q
Q0
Qe
0
22Adjustments at the Margin Markets for Pollution
Rights
- Politically more palatable to business because it
relies on markets rather than taxes for
corrections. - Firms (such as public utilities in the market for
SO2 ) receive a fixed number of pollution
allowances. - These credits can be sold and bought on the CBOT.
- If firms use more pollution than they own credits
for they pay a fine.
23Adjustments at the Margin Markets for Pollution
Rights
S Supply of SO2 pollution rights
2010
24Allowance Trading Basics
- An emissions "cap" A limit on the total amount
of pollution that can be emitted (released) from
all regulated sources (e.g., power plants) the
cap is set lower than historical emissions in
order to reduce emissions. - Allowances An authorization to emit a fixed
amount of a pollutant. - Measurement Accurate tracking of all emissions.
- Sourcehttp//www.epa.gov/airmarkets/trading/basic
s.html
25Allowance Trading Basics
- Flexibility Sources can choose how to reduce
emissions, including whether to buy additional
allowances from other sources that reduce
emissions. - Allowance trading Sources can buy or sell
allowances on the open market. Because the total
number of allowances is limited by the cap,
emission reductions are assured. - Compliance At the end of each compliance period,
each source must own at least as many allowances
as its emissions. - Sourcehttp//www.epa.gov/airmarkets/trading/basic
s.html
26Trading the Right to Pollute
- The NOx Budget Trading Program is a market-based
cap and trade program created to reduce emissions
of nitrogen oxides (NOx) from power plants and
other large combustion sources in the eastern
United States. - Source http//www.epa.gov/airmarkets/progsregs/n
ox/sip.html
27Trading the Right to Pollute
- Market-based sulfur dioxide (SO2) allowance
trading component of the Acid Rain Program - Utilities regulated under the program, decide the
most cost-effective way to use available
resources to comply with the acid rain
requirements of the Clean Air Act. - Purchase pollution allowances.
- Switching to lower sulfur fuel.
- Reduce emissions by employing energy conservation
measures - Source http//www.epa.gov/airmarkets/trading/fact
sheet.html
28Success of Acid Rain Program which includes
trading pollution allowances
- Reduced SO2 emissions by over 5.5 million tons
from 1990 levels, or about 35 percent of total
emissions from the power sector. Compared to 1980
levels, SO2 emissions from power plants have
dropped by more than 7 million tons, or about 41
percent. - Cut NOx emissions by about 3 million tons from
1990 levels, so that emissions in 2005 were less
than half the level anticipated without the
program. Other efforts, such as the NOx Budget
Trading Program in the eastern United States,
also contributed significantly to this reduction.
- Led to significant cuts in acid deposition,
including reductions in sulfate deposition of
about 36 percent in some regions of the United
States and improvements in environmental
indicators, such as fewer acidic lakes. - Source http//www.epa.gov/airmarkets/progress/arp
05.html
29Kyoto Protocol
- Industrialized nations reduce CO2 5 percent from
1990 levels by 2008-2012 compliance period. - United States withdrew in 2001.
- China and India are not required to comply
because they are developing nations. - By 2002 Kyoto only covered about 30 percent of
global CO2 emissions. - Too little too fast.
- Not enough change to make a difference.
- Difficult to comply with for countries who
experienced substantial growth in the 1990s.
30European Union Emissions Trading Scheme (ETS)
- Kyoto with teeth.
- Covers half of Europes carbon emissions. (8 of
global) - Each country creates a national allocation plan
for specifying caps on greenhouse gases. - Businesses can either reduce their emissions or
purchase allowances from facilities with an
excess of allowances. - Allowances traded in the ETS are not printed but
are held in electronic account registries set up
by Member States and are overseen by a Central
Administrator at the EU. - Emissions considered a service under EUs VAT.
- Sources http//ec.europa.eu/environment/climat/em
ission.htm and Nordhaus, William D. The American
Economic Review, After Kyoto Alternative
Mechanisms to Control Global Warming 96(2) May
2006, 31-34
31Alternative International Treaty Options
- Link treaty to specific environmental objectives
rather than a baseline year pollution level.
(e.g. temperature, costs, damages) (Nordhaus
2006) - Use an extended time path. Depart gradually from
a business as usual pattern becoming more severe
over time. (Olmstead and Stavins 2006) - Extend tradable allowances globally. (Olmstead
and Stavins 2006) - Extend participation beyond industrialized
nations to include the developing world and
United States. (Olmstead and Stavins 2006) - Nordhaus, William D. The American Economic
Review, After Kyoto Alternative Mechanisms to
Control Global Warming 96(2) May 2006, 31-34 and
- Olmstead, Sheila M. and Robert N. Stavins. The
American Economic Review, An International
Policy Architecture for the Post-Kyoto Era 96(2)
May 2006, 31-34 and
32Boulder Carbon Tax
- Boulder's City Council adopted the goals of the
Kyoto Protocol in 2002 to reduce greenhouse gas
emissions below 1990 levels by 2012. - On November 14, 2006 with Initiative 202, the
Climate Action Plan Tax, the Boulder Colorado
city council approved a carbon tax which is
applied to residents electric and gas bills. - Average tax for homeowners 1.33/month and
Business 3.80/month - Estimated energy cost savings from implementing
the Climate Action Plan are 63 million over the
long term. - Revenue estimated is 6.7 million by 2012, when
the goal is to have reduced carbon emissions by
350,000 metric tons. - Source http//www.ci.boulder.co.us/index.php?opti
oncom_contenttaskviewid6136Itemid169 and
http//www.env-econ.net/2006/11/a_carbon_tax_in.ht
ml