Environmental Policy Tools - Environmental Economics - Lecture Slides, Slides of Environmental Economics

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Environmental Policy Tools

Possible Interventions

1. Moral suasion

2. Government provision of goods

3. Damage prevention

4. Command and control

5. Economic Incentives

Focus on case of negative externality

and compare:

1. Command and control (direct regulation)

2. Tax

3. Subsidy

Command and Control

Set limit on emission or specify technology

SMC = PMC + MD

Q Q

M

PMC

PMB=SMB

MAX

Subsidy

Often used in conjunction with technology

MSC (Tech 1)

MPC (Tech 1)

MPC (Tech 2)

MSC (Tech 2)

Subsidy

Command and Control

1. When monitoring costs are high

2. When optimal emission is near zero

3. During random or emergency events

Consists of government-specified rules and

regulations, often with fines and charges for

violations. Most effective:

Marginal abatement cost function

Marginal abatement =

pollution reduction of one unit.

The marginal abatement cost (MAC) function

measures the dollar amount of the cost of

reducing pollution by one unit.

Marginal abatement cost function

E 1 Emissions

Cost MAC

Total Abatement Cost C (^1)

EU

Marginal Abatement Cost

Shape of curve depends on technology of clean-up

Optimal level of pollution

E 1 Emissions

MAC

Total Abatement Cost

EU

Damages, Costs (^) MD

Total Damage

Socially inefficient (sub-optimal)

levels of pollution

Excess social cost from too much abatement

Excess social cost from too little abatement

E 1 Emissions

MAC

EU

Damages, Costs (^) MD

Pollution tax

Goal: set tax = marginal damage cost

Why: encourage polluter to “internalize” the

externality

Key: Tax the externality, not the product.

Actual Tax Payment

Tax Avoidance

Potential Tax Payment

Polluter behavior with tax

E^ Emissions 1 =

Costs MAC = 10 - E

Tax=

EU =

T*Q=

Tradable Pollution Permits

1975 the U.S. EPA started an Emissions

Trading Program to reduce air pollution.

Support for this market-based approach has

grown both among businesses and

environmentalists.

What is a tradable permit?

lexible approach to reaching target level of pollution

ny source that reduces emissions more than required

eceives an “emission reduction credit” (ERC).

RCs can be used to satisfy emission targets at other

ischarge points for which the MAC is higher.

RCs can transferred or sold, thus allowing sources to

ind the cheapest means to controlling emissions.