Economic Incentive Versus----- Command and Control: Whats the Best Approach for Solving Environmental Problems By Winton Harrington & Richard D. Morgenstern Fall/Winter 2004, Resources, pp

No Single Solution Economic Incentives (EI) –Some sort of monetary fee/fine per unit of pollution emitted Command and Control (CAC) –Direct regulation Study looked at six environmental policies in the United States and European Union.

Six Policies SO 2 emissions from utility boilers »Permit Market (US) »Sulfur Emissions Standards (Germany) NO X emissions from utility boiler s »Emission Taxes (Sweden and France) »New Source Performance Standards (U.S.) Industrial Water Pollution »Effluent fees (Netherlands) »Effluent Guidelines and National Pollutant Discharge Eliminations System Permits (U.S.) Leaded Gasoline »Marketable Permits for leaded fuel production (U.S.) »Mandatory Lead phase out differential taxes to prevent misfueling (most of Europe) Chlorofluorocarbons (CFCs) »Permit Market (U.S.) »Mandatory Phase Out (Other Industrial Countries) Chlorinated Solvents »Source Regulation (U.S.) »Three Distinct Policies (Germany, Sweden, Norway)

Evolution of the Policy In the 1970s, CAC approach was predominant. Policymakers switched over to a more EI policy sometime between the 1970s &1990s. –Could be because they were more aware –Also, it could be because tradable emissions permits in the 70s came into existence –Could just be disappointment in CAC regulations

The Two Sides of the Pond: Comparisons The United States is a single federal body whereas the European Union is multiple countries. Differences in pre-regulatory studies undertaken. U.S. EPA is required to conduct a Regulatory Impact Study before taking action. So, it is easier to determine the possible benefits. Environmental Taxes are virtually nonexistent in the U.S. Europe uses regulatory taxes more often.

Testing the Hypothesis Whats the Best Approach? The authors compiled 12 most commonly used hypotheses. Then they focused on the five that they felt were the most important.

1) EI More Efficient than CAC There is a perceived efficiency of EI over CAC. Not Air Tight case though. EI is more cost effective at given emissions reduction. However, efficiency requires a system of perfect competition and emissions are not location specific. In the US for instance: –EI achieved substantial cost savings in elimination of CFCs, and lead in gasoline –lowered SO 2 emissions & realized costs are 1/2 of expectations in 1990 and a 1/4 of expected CAC cost. –However where EI are too strict, EI do not achieve cost savings over CAC

2) EI Gives Continual Incentive for New Technology EI is sometimes favored because it seems not to hamper technology in the same way as CAC. –E.g. in Sweden, the NO x tax caused experimentation in boilers U.S. research shows that CAC only encourages cost-reducing innovation, while EI causes cost-reducing and emission reducing innovation.

3) CAC policy achieves objectives quicker & w/ more certainty In the 1970s, CAC was effective in causing quick compliance in some cases. –Solvent Trichloroethylene (TCE) phase out resulted in little participation w/ EI aspects in the U.S. –Europe needed to use CAC in addition to Tax Differentials to achieve any progress by: »Mandating Catalytic Converters »Maximum Lead Content On the other hand EI was effective: –In Holland, the influence of effluent fees (a EI) on organic waste load reductions was prompt and large. The problem is that both policies can have undesirable long term effects. –Regulated new coal power plants just extend the life of older non-regulated ones. –In Sweden, TCE users gained multiple waivers.

4) Regulated Industry prefers CAC EI has lower social costs, but has higher costs to the firms In many industries, the firm pays the cost of abatement plus a fee for the remaining pollution it discharges. In reality, nearly all governments eliminate the burden of the EI instruments by returning fees to the firm France subsidized the firms abatement investments on NO x discharge fees. Sweden fees were returned on the basis of the energy they produced. In the U.S., tradable permits have always been given away rather than auctioned off.

5) CAC have higher Administration Cost EI fees for increased emissions tend to rise gradually, whereas in CAC a line separates compliance from violation. No clear pattern. –Both CAC Effluent Guidelines and EI lead phase down program put higher costs on EPA. –US EI SO 2 program had low admin. costs. –Germany CAC SO 2 program had roughly same costs as EI

Conclusions EI appears to produce costs savings in pollution abatement as well as innovation. Firms prefer CAC regulation because of a perceived lower cost to them. Today, most policy is a blend of both, and they have been successful. Emissions fell by 2/3 compared to base line results.