Gov’t Solutions for Pollution Feb 6th 2013

Review: Pursuing Efficiency Examples: The offshore oil rigs provide oil to the US, making many drivers happy. However, occasionally, oil rigs blow up, killing and polluting. Pursuing Efficiency: If paying the cost of lost shrimping, lost life, dead birds, dead fish plus drilling cost is low compared to the benefits of this oil, then do it (maximize net benefits) Pursuing Fairness/Safety: We as a society determine that we don’t want any of those costs, and so we limit offshore drilling. Thus, we pay higher fuel costs and consume less fuel, which is harmful to consumers, but we hope it saves lives and pollution which we deem unacceptable. Less consumerism may sound good to you (and it does to me) but I also benefit from the many consumerist things available to me (cheap fuel allows me to see family, to travel, to have more to spend on good food, all of which makes my life easier and better – the hard part is weighing those gains against the losses to those affected by the spill). If something is not fair, try to divorce the idea that big companies are at fault and remember that their size may be indicative that they provide a lot of value to people

Why Efficiency Implementable in practice Fair is hard to define and practically hard to adjust or affect - consider the minimum/living wage For environmental regulation, pursuing efficient policies engenders less political opposition. More costly/wasteful policies cause more opposition. Pursuing efficiency maximizes the size of the economic pie… In the long run, pursuing efficient policies hopefully makes everyone better off, even if in he short-run some are hurt while many others are helped. Efficiency is not the ultimate decider of whether society should pursue a policy, but a good tool to pay attention to.

Berck on Efficiency (p 46) "Markets do not necessarily result in equitable allocations of goods. A market may allocate goods in a Pareto-improving manner yet result in great inequities between richer and poorer people…. Markets are not designed to address issues of distribution of wealth.” markets aren't really designed at all - they often emerge as a means of making people better off, richer or poorer.   the overall tone seems to imply that if we want to address equity, we should look elsewhere ( e.g. minimum wage policy), and while these equity-improving actions may improve equity, they also might not, and are often unfair to certain classes of people.  

Pollution Reduction Tools Given that we want pollution reduction, what tools can regulators use? Require polluters to do things that pollute less Command them to limit their pollution. Control them to ensure compliance. Also called Standards Input – restrict use of lead in gasoline, paint, etc. Restrict what pesticides farmers may use. Technology – smokestacks and scrubbers, building standards: http://publicecodes.cyberregs.com/st/ca/st/b2400v10/st_ca_st_b2400v10_4_sec013.htm Emissions – Nox per mile from tailpipes (EPA) Ambient – acceptable pollution concentrations (NAAQS – CO, Pb,NO2, O3, etc. http://classic.wunderground.com/cgi-bin/findweather/getForecast?query=95050 Put a price on pollution and let polluters decide how much to emit. Market Based Incentives (MBIs) Tax it or allocate permits to a specific quantity of pollution and allow trading

Pricing Pollution Hayek – Prices are signals that tell us to conserve or to use more. Therefore, by making pollution more expensive for polluters, we get less pollution without mandating specific behavior. Polluters, when faced with a price for pollution, will either abate or pollute and pay the price. Ensures that the MC of abatement is the same across different sources (equimarginal principle)

Taxing Pollution Taxing pollution leads to some abatement (the cheap, low hanging fruit) and some revenue to the government. In this figure, the most they can abate is 13.4 million tons, an estimate of their total emissions.

Pricing pollution with cap and trade Allow buying and selling permits to pollute NOx. Determine how much pollution is desired (e.g. 13.4 million pounds). Create 13.4 million permits, where the owner of a permit is entitled to pollute 1 pound. Assign permits to polluters. Auction / give away. Let the parties trade if they so choose If a firm is polluting more than its permit allotment allows, it will either buy a permit to pollute if the cost of the permit is less than the cost of abatement, or if not, will abate more. requires enforcement and monitoring

Cap and Trade Problem Gains from Trade Problem: Cars pollute 22.1 million tons in total; power plants pollute 13.4 million tons in total. Total=35.5. Goal: 13.4 million tons of pollution (22.1 m. tons abatement) Currently, cars abate 15.4 million pounds, Power Plants abate 6.7 million pounds. Assign 13.4 million permits to pollute equally, thus with no trading, each sector is legal with their current emission levels. What trades are likely between power plants and cars? How much money will change hands, and who will pay who? Estimate a range of values. PP buys 4 million permits (now they own 4+6.7=10.7 – thus they are polluting 4 million more pounds), WTP $2.76 million Their abatement cost of 4 million tons Cars WTA $1.76 million to abate more (the cost of abating 4 million more tons from 15.4 to 19.4). Now cars give up 4 million permits, own 2.7. Total Permits = still 13.4, but power plants do much less abating. Gains from Trade