1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 14 Stationary-Source Local Air Pollution

2. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-2 Economics and Pollution Control The Two Big Questions 1.What is the optimal level of pollution? 2.How should it be allocated among its sources (firms)?

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-3 How Do We Get There? Standards (command and control)  Set the overall standard at Q*  Calculate the amount of reduction necessary  Set uniform reduction goal for all firms Taxes/Emission Charges  Set the tax = externality cost at the optimum Q*  Firms will internalize the cost Tradable Permits (Coase)  Allocate right to pollute (Q*/N)  Allow firms to set price for trading permits

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-4 Conventional Pollutants The Command-and-Control Policy Framework Conventional or “criteria” pollutants are common substances such as sulfur oxides, particulates, carbon monoxide, ozone, nitrogen dioxide and lead. They are thought to be dangerous only at high concentrations. The historical approach to air pollution control has been known as command-and-control approach based on emissions standards.

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-5 A Brief History of the US Experience 1955 Pollution Control Act  Primarily funded research into pollution issues 1967 Clean Air Act  Recommended standards  Onus on states to enact 1970 Clean Air Act Amendment  Set federal standards for primary (health) and secondary (aesthetics, vegetation) ambient levels

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-6 1970 Clean Air Act Amendment Primary Standards  National legal ceilings on ambient level of pollutants  Health standard Minimum threshold such that there would be no health effects Costs could not be considered  Best available control technology (BACT)

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-7 TABLE 16.1 National Ambient Air- Quality Standards (1 of 2)

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-8 Cost-Effectiveness of the Command-and-Control Approach Typically not cost-effective.  Ratio of CAC cost to least cost varied from 14:1 to 22:1 in most cases (8 of 10)  CAC will be close to cost-effective only if a high degree of control is necessary such that all sources are forced to abate as much as is economically feasible. Sulfates in LA SO2 in Lower Delaware Valley While inefficient, CAC policies have resulted in better air quality in developed countries.

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-9 TABLE 14.2 Empirical Studies of Air Pollution Control

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-10 TABLE 14.3 Trends in U.S. Emissions and Air Quality

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-11 Innovative Approaches The Offset Program This program is acquired when a source controls emission to a higher degree than legally required. The policy allows qualified new or expanding sources to emit pollution in a nonattainment area, provided they acquire sufficient emission reduction credits from existing sources.

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-12 The Effectiveness of This Early Application The emissions trading program has substantially reduced the cost of complying with the Clean Air Act. Transaction cost has also increased. The initial allocation of permits has an effect on the potential for price-setting behavior.

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-13 Smog Trading State initiatives have also resulted in innovative programs such as California’s Regional Clean Air Incentives Market (RECLAIM). The 400 participating industry polluters under RECLAIM receive an annual pollution limit, which decreases by 5–8% annually for the next ten years. Polluters are allowed to use flexible approaches such as purchasing credits from other firms.

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-14 Washington’s Clean Air Proposal Requires industries to limit greenhouse emissions  Starts in 2012 – limits overall emissions to 1990 levels by 2012 Continues to reduce emissions over time to half Each source limited to 25,000 metric tons of CO2  Establishes tradable permits 1 ton permits EcoNW estimates current pollution costs at $3.8B  Health costs at $1.3B

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-15 Hazardous Pollutants The Clean Air Act requires the EPA to frequently identify hazardous pollutants. Once a substance is listed, the EPA has 180 days to regulate emissions. This requires setting a national standard for the pollutant. The EPA has incorporated risk assessment and benefit-cost analysis into their decisions.

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-16 TABLE 16.4 Net Benefits ($Million/Year) of Alternative Strategies for a Value of Life Saved of $1 Million