Topic 5: Public Policy Instruments Command and Control Strategies

California Air Quality: Effectiveness of Standards http://www.arb.ca.gov/videos/clskies.htm

Learning Objectives At the end of this session, you should be able to Appreciate the complexity of applying standards as a tool in improving environmental quality Understand the differences between the three major types of standards Evaluate the issues underlying the application of standards in relation to the levels at which they should be set, whether they should be uniform or not and their incentive effects Discuss the issues in relation to enforcement of standards

Command and Control Polices Relies on Standards Mandated level of performance that is enforced by law Types of Standards Ambient Standards Emission Standards Technology Standards

Theoretical Impact of Standards Fig 1 Assume that the actual rate of emissions – e1 Gov. introduces a standard set at e* as maximum level of emissions Cost to firm = area a = compliance costs € MD MAC a e* e1 Emissions

The EU National Emissions Directive 2008 Sets a maximum limit on sulphur dioxide concentrations Ambient standards are normally expressed in terms of average concentration levels Limits on sulphur dioxide are set at 125µg/m3 (micrograms per cubic meter) on a 24 hour basis and not to be exceeded more than 3 times a yr and a 350 µg/m3 on an hourly basis and not to be exceeded more than 24 times a year.

The Economics of Standards Three Questions What is the appropriate level at which the standard should be set? Should the standard be applied uniformly? What are the incentive effects of standards?

What is the appropriate level to set the standard? Should you take into account marginal damages and marginal abatement costs? Zero-Risk level ‘Reasonable level’ Efficient Emission level Strict Standards ----’Technology Forcing’

At what level do you set standards? Fig 2 e2= threshold level e* = efficient level e3= reasonable level € MD MAC a e2 e* e3 e1 Emissions

Should Standards be applied uniformly? The efficient level of pollution can vary for many reasons ( for eg geographic areas, meteorological conditions; specific time period etc) Setting a single standard may not be efficient See fig 3

Should Standards be applied uniformly? Fig 3 eu= efficient level of emissions for urban area er = efficient level of emissions for rural area Setting one standard not efficient MDu € MDr MAC a e2 eu er e1 Emissions

Problem with standards: Equi Marginal Principle Authorities set standards according to equi-proportionate method rather than the equi- marginal principle Equal standards approach will produce less reduction in total emissions than would be achieved under equi-marginal principle Govs do not have knowledge of MAC curves of polluters

What are the incentive effects of standards? How do standards affect the incentives of firms? Key Question: Does the policy create incentives for sources to reduce emissions in cost effective ways? Two Scenarios Short-Run Long-Run

Short Run Standards are an all or nothing approach No incentives for firms to do better Take away decision flexibility from producers (ie technology standards)

Incentives in the Long Run Do standards provide incentives for innovation (managerial or technical) which make it less costly to reduce emissions? WRT technology standards: NO (Why not?) Wrt Emission standards: Yes See fig 4

Emission Standards: Short Run and Long Run Incentives Fig 4 Firm in 2 situations MAC1 – represents abatement costs in SR MAC 2- represents abatement costs in LR If emission standard is set at e2, compliance =a +b for MAC1 If emission standard set at e2, compliance = b for MAC2 a = r& d incentive € MAC1 MD MAC2 a b e1 e2 Emissions

Enforcement Enforcement of standards takes resources Penalties are not often sufficient Trade-off between resources used in enforcement and benefits of greater compliance Should standards be set with enforcement costs in mind? Size of sanction for non-compliance See fig 5

The Economics of Enforcement Fig 5 C1 & C2 are curves that combine MAC and marginal enforcement costs Correspond to different technologies of enforcement Origin at e0 (why?) At C1: Total costs equal to enforcement costs (a +b) and abatement costs (c +d) What are the total costs at C2? MD € C1 C2 MAC a e b f c d eo e2 e1 Emissions

Enforcement Costs Should standards be set with enforcement costs in mind? What should the size of the sanction for breaching standards be set at? Should authorities set less or more strict standards? Why or why not?

Summary Standards are the most popular method of pollution control There are three primary types of standards (ambient, emissions and technology) Important questions are 1) what level to set the standards at ?2) Should standards be uniform? and 3) what are the incentive effects of standards? Enforcement including available sanctions are an important issue Standards are very complex tools when applied to environmental policy

Required Reading Field & Field (chapter 11) Case Study: Air Quality Standards: What does the automotive industry think?