Topic 6 : Incentive Based Strategies Emission Charges

Learning Objectives After this topic You should have an understanding of the economic and social impact of the application of emission charges You should be able to evaluate the benefits and costs of emission charges and compare these with other methods of pollution control

Plastic Bag Tax http://www.youtube.com/watch?v=zhUspLMS0MM&NR=1

Incentive Based Strategies Two Types 1. Charges and Subsidies 2. Transferable Discharge Permits

Emission Charges “ You may discharge any amount of residuals you wish, but your emissions will be measured and you will be required to pay a certain charge for every unit of effluent you discharge”

Emission Charges and Competition Firms will reduce emissions until marginal abatement costs are equal to the charge on emissions (the tax) Assumes competitive environment Standards are less costly than emission charges or taxes

At what level should the charges be set? In competitive environments, higher charges will bring about greater reductions in emissions If we know the marginal damages associated with the pollutant, then fix the tax to produce the socially efficient level of pollution (MD =MAC) See fig 1

Setting the Emission Charge Fig 1 At t*, MD =MAC and emissions are e* Cost of total emission control = total abatement costs and total tax payments What are total abatement costs? What are the total tax payments What is the social cost of policy? € MD MAC t* c f a d e b e1 e* e0 Emissions (tons/year)

Setting the Emission Charge Fig 1 By how much has damage been reduced? What are the remaining damages? Tax take exceeds remaining damages Flat tax Two part emission charge € MD MAC t* c f a d e b e1 e* e0 Emissions (tons/year)

Emission Charges: Unknown Marginal Damages If marginal damages are unknown, then finding the efficient tax rate is more difficult Emissions and Ambient Quality Successive Approximation Process

Emission Charges and Cost Effectiveness Emission Charges are cost effective If the same rate of tax is applied to different sources with different MAC and each source reduces its emissions to the point where the MAC = tax rate then MACs will be automatically equalised across sources Emissions charges will lead to larger proportionate emission reductions from firms with lower abatement costs Satisfies the Equi-Marginal Principle

Emission Taxes and Non-Uniform Emissions Not all sources have the same marginal damage functions (as was previously assumed) If marginal damages vary, then a single emission charge may not be efficient Zoned Emission Charge Within each zone the government charges the same emission tax, however, the rate of emission tax can vary between zones

Non-Uniform Emissions

Zoned Emission Taxes

Emission Charges and Tax It is uncertain by how much a tax will reduce emissions The effectiveness of the policy will depend on the slope of MAC’s These may be unknown Tax revenue will also vary according to the slope of the MACs http://bigthink.com/think-tank/the-carbon-tax-is-it-time-to-follow-australias-lead

Tax Revenue and Slope of MAC Flat MAC Steep MAC € € MAC1 MAC2 th a d tl b c f e e4 e1 e2 e3 Emissions (ibs per month) Emissions (ibs per month

Emission taxes How does emission reductions vary with the elasticity of MAC curves? How does tax revenue vary with the elasticity of the MAC curves? What are the implications for gov. policy?

Emission Charges and Innovation Emission charges provide strong incentives to innovate Their potential cost savings from new innovative pollution control techniques are larger than under emission standards Why is this the case?

Emission Charges and Innovation Incentive to innovate Effluent charge of t with initial technology MAC2 What are the costs to the firm? What would the cost be if e1 was an emission standard? If firms introduced new technology (MAC2) Implications? € MAC1 MAC2 t c d a b e e2 e1 ē Emissions (tons/year)

Emission Charges and Enforcement Costs Much more difficult to enforce Tax bill to firms Identify Source Measurability is a key issue Requires permanent monitoring equipment Monitoring requirements are much more stringent than those required by standards

Distributional Impacts of Emission Charges Two impacts 1. Impacts on prices and output of goods and services Firms Consumers workers 2. Effects stemming from the expenditure of tax funds Reading: http://www.naturvardsverket.se/Documents/publikationer/620-8245-0.pdf

Summary Emission charges put a price on pollution Prime advantage = efficiency aspects Also provide strong incentive to innovate Provide a source of tax revenue Difficult to determine the impact of the tax on emission reductions and revenue Difficult to monitor