Notes for Chapter 13 ECON 2390 (see notes)

Summary of main policies for pollution control Problems with pollution control policies Moral suasion is “preachy” and easy to ignore Taxes tend to create adversarial situations between government and citizens (households and businesses) Subsidies are a transfer from the tax payer to the polluter and are politically difficult is we reward polluters. The private market approach (Coase Theorem) requires assignment of rights and willingness of parties to negotiate

Transferable Development Permits TDP This is the core idea behind cap and trade programs TDP is a government created market where –everyone is allowed to pollute to a certain maximum, and no more. –those who pollute less than this maximum are allowed to sell the right to others who pollute more. The idea is that to pollute more than the standard imposes an additional cost. This will increase the incentive to cut back through introduction of new technology or changed practices. Note that the revenue flow is from polluters to non- polluters – this is key to understanding the incentives

In this case, pollution credits are awarded in proportion of the level emitted – 30 for A and 50 for B to reach a total of 80. A receives 30 credits and B receives 50 credits. An incentive exists to sell/buy if the MACs differ at the emission levels.

TDP – key issues Can serve to define a target level of emissions like standard Cost effective since the polluters must negotiate the trade. It is not necessary for the MACs to be known – fairly good bet that they are different. Once the target is set, market transactions will identify the MAC As long as MACs differ, and prices “split” the difference, trading should occur. Both polluters will enjoy cost savings (gains from trade)

TDP – challenges 1.Initial rights allocation –cannot flood the market with rights –what rules are used to allocate rights Equal Proportional to pollution –Are rights free or sold? –The key is to distribute rights widely

2.Trading rules –Who is allowed to trade (best outcomes allow free trades, however regulators usually want to meddle). –Should advocacy groups be allowed to buy and burn? This will restrict supply drive up the price and discourage trading. TDP – challenges

3.Non-uniform/mixed emissions TDP – challenges Without the zones, those polluters down wind may not participate Multiple trading zones create complexity

Competition –Many buyers and sellers ensure efficient markets –TDP applied to specific areas may limit the numbers interested in participating in the market –This is termed a “thin” market and is prone to distortion (domination by a few sellers or buyers) TDP – challenges

TDP and R&D Technical change lowers MAC Gain from MAC = a vs b TAC 1 = a+b TAC 2 = d+b TDP is needed to compensate for the fact that d+b>a+b TDP gains are c+d TDP = effluent tax What are the advantages?

Objections to TDP Utilities that need to buy TDPs will pass it on as a tax (if they are allowed) and those who gain credits will increase profits. Firms can enter an industry to claim credits (scam the system).

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