Policy for Market failure Prescriptive/Command and Control Strategies: “Standards”

Instrument taxonomy Early environmental policies, such as the Clean Air Act of 1970 and the Clean Water Act of 1972, relied almost exclusively on the command and control (standards) approach. (Stavins, 1998)

Types of standards Performance standard: a regulation prescribing a maximum allowable pollution level. Two common forms: Emissions rate: a never exceed level for a quantity of emissions from a polluter E.g. emissions/year; emissions/(unit of input); emissions/(unit of output) Ambient concentration: a never exceed level for a pollutant in the environment E.g. TMDLs (Total Maximum Daily Loads of contaminants in streams and rivers)

Types of standards Technology based standard: a regulation prescribing specifying the method (sometimes the actual equipment) that firms must use. 1977 Clean Air Act Amendments: new electric power plants required to install scrubbers to reduce SO2 in flue gas (K&O p. 130) catalytic converter required on automobiles to reduce concentrations of emissions

Example: Clean Air Act of 1970 Required that costly scrubbers be used by coal-fired electricity plants even though it would have been cheaper to achieve SO2 reductions by substituting to low sulfur coal. Imposed by senators from eastern states with high sulfur coal. Political feasibility: could not otherwise have passed congress. Hackett, S., Environmental and Natural Resources Economics: Theory, Policy, and the Sustainable Society, 3rd Edition (New York: M.E. Sharpe, 2006), p. 224.

1/27/16: California Energy Commission adopts nation's first-ever rules for LED lighting (Mulkern, Greenwire, 1/28/16) Claimed effect: >$4B energy savings over 13 years; conserve electricity to power ~400K average homes. http://www.eenews.net/greenwire/2016/01/28/stories/1060031314 http://www.energy.ca.gov/releases/2016_releases/2016-01-27_adoption_of_lighting_standards_nr.html

EPA Sets Thresholds for Greenhouse Gas Permitting July 2011: Clean Air Act permitting requirements for GHGs will kick in for large facilities all new facilities with GHG emissions of at least 100,000 tpy and modifications at existing facilities that would increase GHG emissions by at least 75,000 tpy must use best available control technologies to minimize GHG emission increases Update: 2013: http://www.epa.gov/nsr/ghgdocs/20120914CAAACPermitStreamlining.pdf http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/ea1bf25579e541b1852577220055c20c!OpenDocument http://www.biologicaldiversity.org/programs/climate_law_institute/global_warming_litigation/clean_air_act/pdfs/Clean-Air-Act-FAQ.pdf “In response to a Clean Air Act petition and litigation, the U.S. Supreme Court ruled in 2007 that greenhouse gases are “air pollutants” under the Clean Air Act and must be regulated if the EPA determines through an “endangerment finding” that they “may reasonably be anticipated to endanger public health or welfare.” The EPA has released a draft endangerment finding and is moving forward with greenhouse gas pollution reductions under several sections of the Clean Air Act — including sections that address mobile (e.g. automobiles, ships, and airplanes) and stationary (e.g. smokestacks) sources.” Update 12/23/10: http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/cad212db554919ec8525780200570c1c!OpenDocument Beginning in January 2011, industries that are large emitters of GHGs, and are planning to build new facilities or make major modifications to existing ones, must obtain air permits and implement energy efficiency measures or, where available, cost-effective technology to reduce their GHGs emissions. This includes the nation's largest GHG emitters, such as power plants, refineries and cement production facilities. Emissions from small sources, such as farms and restaurants are not covered by these GHG permitting requirements. 1/28/11: http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/1803003975383dca85257826006a5fee!OpenDocument The agency is in the process of gathering information and seeking important input and, as part of a settlement agreement announced December 23, 2010, will propose GHG standards based on existing technologies for power plants in July 2011 and for refineries in December 2011. The agency will issue final standards in May 2012 and November 2012, respectively.

Basic model of performance standards Initial emissions, e1 Impose a standard of a maximum of e* tons/year emitted Given e*, what area represents: total abatement cost, TAC? total damage, TD? (standard pollution control model) b c

Basic model of performance standards Initial emissions, e1 Impose a standard of a maximum of e* tons/year emitted Given e*, what area represents: total abatement cost, TAC? total damage, TD? (standard pollution control model) b c

Empirical evidence of standards lack of cost effectiveness (Stavins, 1998) One survey of 8 empirical studies of air pollution control found that C&C standards were anywhere from 1.07 to 22.0 times more costly (TAC) to implement than the least-cost alternative policy instrument. 1.07 for sulfate emissions in the Los Angeles area to 22.0 for hydrocarbon emissions at all domestic DuPont plants www.tva.gov/

When might standards be preferable? Hotspots: market-based instruments may allow for areas of high pollution which is problematic for some emissions (e.g. mercury). Certain control technology may be so effective/ available that mandating is more effective than regulating “emissions” (e.g. double-hulled oil tankers). Too costly to effectively monitor emissions (e.g. catalytic converters on automobiles). NADP 2014: precipitation-weighted mean concentrations and deposition image: Yes I Can Science http://nadp.sws.uiuc.edu/maplib/pdf/mdn/hg_Conc_2014.pdf thinglink.com

Summary of conclusions on standards in policy Initially appear simple and straightforward Potential weaknesses: Lack of short- and long-run cost effectiveness Limited flexibility in achieving goals Weak incentive for innovation may lock in particular technologies Potential advantages: monitoring and enforcement costs avoiding “hotspots”

Additional slides for review outside of class

Standards are often set uniformly but this is not typically cost-effective Standards are often uniform (identical across firms). The central issue in assessing the cost effectiveness of standards Typically firms will have different MAC functions Uniform standard will not be cost-effective Could achieve greater reduction at same total cost, or Could achieve same reduction at reduced total cost

Cost effective pollution control: Minimizing costs $ e: emissions perf. standard What area represents total abatement costs (TACA) for this single polluter? MACA Z e0 e emissions, e abatement

Cost effective pollution control: Minimizing costs $ MACB e: emissions perf. standard (uniform across both A & B) What area represents total abatement costs, in agg. for both polluters: TAC = TACA +TACB? Is the uniform standard cost effective? MACA Y Z eA = eB = e0 e emissions, e

Cost effective pollution control: Minimizing costs $ MACB e: emissions perf. standard (uniform across both A & B) What area represents total abatement costs, in agg. for both polluters: TAC = TACA +TACB? Is the uniform standard cost effective? MACA Y Z eA = eB = e0 e emissions, e

Cost effective pollution control: Minimizing costs e * 2 = e*A + e*B reallocate abatement but keep aggregate emissions the same  non-uniform std. What area represents total abatement costs, in agg. for both polluters: TAC = TACA +TACB? What expression specifies reduced TAC from non-uniform standard? $ MACB MACA Y1 Note: Y=Y1+Y2 Z=Z1+Z2 Y2 X Z1 Z2 e0 eA = e*A e emissions, e eB = e*B

Arguments… For uniform standards: Lower implementation costs (likely lower than for non-uniform standards) to make non-uniform standards cost-effective, you need the MAC function for every source – a costly information requirement equity (treats everyone alike…which is not necessarily always a fair or equitable approach) Against uniformity: When marginal abatement costs differ among sources Uniformity is not cost-effective (assuming MAC curves known or “easy” to assess) Equity and leveling the economic playing field don’t necessarily imply equal standards.

Incentives generated by standards (long-run impacts) Technology innovation Conceptual model: + demand for abatement tech. + R&D  + technology innovation  MAC curve falls Standards: tend to freeze development of technologies which would lead to greater levels of control. Especially technology standards Little or no financial incentive to exceed control targets (Stavins, 1998) A business that adopts a new technology may be "rewarded" by being held to a higher standard of performance A business that adopts a new technology may be "rewarded" by being held to a higher standard of performance, NOT given the opportunity to benefit financially from its investment (except to the extent its competitors have even more difficulty reaching the new standard)

Use the basic model to examine incentives for innovation Start: MAC1 … innovationMAC2 Questions: Given a mandated standard of e2 (assume compliance is perfect) What level of abatement does the firm choose? (Under MAC1? MAC2?) What is the firm’s TAC (total abatement cost) at this level? What is the incentive (the benefit to the firm) to innovating? The new (post-innovation) socially efficient level of emissions is e3, What happens to R&D incentive if the firm believes the post-innovation standard will be set to e3?

Cost effective pollution control: Minimizing costs This is how your textbook presents the ideas from the slide “Cost effective pollution control: Minimizing costs”. (Can be more confusing for some.) What does the area described by c represent? K&O, figure 9.1