1. Topic 6 : Incentive Based Strategies
Emission Charges

2. Learning Objectives After this topic
You should have an understanding of the economic and social impact of the application of emission charges
You should be able to evaluate the benefits and costs of emission charges and compare these with other methods of pollution control

3. Plastic Bag Tax

4. Incentive Based Strategies
Two Types
1. Charges and Subsidies
2. Transferable Discharge Permits

5. Emission Charges
“ You may discharge any amount of residuals you wish, but your emissions will be measured and you will be required to pay a certain charge for every unit of effluent you discharge”

6. Emission Charges and Competition
Firms will reduce emissions until marginal abatement costs are equal to the charge on emissions (the tax)
Assumes competitive environment
Standards are less costly than emission charges or taxes

7. At what level should the charges be set?
In competitive environments, higher charges will bring about greater reductions in emissions
If we know the marginal damages associated with the pollutant, then fix the tax to produce the socially efficient level of pollution (MD =MAC)
See fig 1

8. Setting the Emission Charge
Fig 1
At t*, MD =MAC and emissions are e* Cost of total emission control = total abatement costs and total tax payments What are total abatement costs? What are the total tax payments What is the social cost of policy? € MD
MAC t* c f a d e b e1 e* e0
Emissions (tons/year)

9. Setting the Emission Charge
Fig 1
By how much has damage been reduced?
What are the remaining damages?
Tax take exceeds remaining damages
Flat tax
Two part emission charge € MD
MAC t* c f a d e b e1 e* e0
Emissions (tons/year)

10. Emission Charges: Unknown Marginal Damages
If marginal damages are unknown, then finding the efficient tax rate is more difficult
Emissions and Ambient Quality
Successive Approximation Process

11. Emission Charges and Cost Effectiveness
Emission Charges are cost effective
If the same rate of tax is applied to different sources with different MAC and each source reduces its emissions to the point where the MAC = tax rate then MACs will be automatically equalised across sources
Emissions charges will lead to larger proportionate emission reductions from firms with lower abatement costs
Satisfies the Equi-Marginal Principle

12. Emission Taxes and Non-Uniform Emissions
Not all sources have the same marginal damage functions (as was previously assumed)
If marginal damages vary, then a single emission charge may not be efficient
Zoned Emission Charge
Within each zone the government charges the same emission tax, however, the rate of emission tax can vary between zones

13. Non-Uniform Emissions

14. Zoned Emission Taxes

15. Emission Charges and Tax
It is uncertain by how much a tax will reduce emissions
The effectiveness of the policy will depend on the slope of MAC’s
These may be unknown
Tax revenue will also vary according to the slope of the MACs

16. Tax Revenue and Slope of MAC
Flat MAC
Steep MAC € €
MAC1
MAC2 th a d tl b c f e e4 e1 e2 e3
Emissions (ibs per month)
Emissions (ibs per month

17. Emission taxes
How does emission reductions vary with the elasticity of MAC curves?
How does tax revenue vary with the elasticity of the MAC curves?
What are the implications for gov. policy?

18. Emission Charges and Innovation
Emission charges provide strong incentives to innovate
Their potential cost savings from new innovative pollution control techniques are larger than under emission standards
Why is this the case?

19. Emission Charges and Innovation
Incentive to innovate
Effluent charge of t with initial technology MAC2
What are the costs to the firm?
What would the cost be if e1 was an emission standard?
If firms introduced new technology (MAC2)
Implications? €
MAC1
MAC2 t c d a b e e2 e1 ē
Emissions (tons/year)

20. Emission Charges and Enforcement Costs
Much more difficult to enforce
Tax bill to firms
Identify Source
Measurability is a key issue
Requires permanent monitoring equipment
Monitoring requirements are much more stringent than those required by standards

21. Distributional Impacts of Emission Charges
Two impacts
1. Impacts on prices and output of goods and services
Firms
Consumers
workers
2. Effects stemming from the expenditure of tax funds
Reading:

22. Summary Emission charges put a price on pollution
Prime advantage = efficiency aspects
Also provide strong incentive to innovate
Provide a source of tax revenue
Difficult to determine the impact of the tax on emission reductions and revenue
Difficult to monitor