Transcript Lecture Seven

The Economics of Environmental
Regulations
Pollution Tax and Markets for
Transferable Pollution Permits
Effluent Charge
• An Effluent Charge is a tax or a financial
penalty imposed on polluters by
government authorities. The charge is
specified on the basis of dollars or cents per
unit of effluent emitted into an ambient
environment. Example, a carbon tax (per
ton of carbon emitted) to address the
concern for global warming.
The Analytic of Effluent Charge
• How does effluent charge work? Show this
using Figure 6.1 (see the handout).
Principal Advantages of Effluent
Charges
• In principle, they are relatively easy to
administer.
• They are generally cost-effective, but not
necessarily socially optimal.
• They generate revenues while correcting price
distortions--the double dividend feature of
effluent charges.
• They tend to provide firms with incentives to
invest in pollution control technology.
Main Disadvantages of the
Effluent Charges
• Monitoring and enforcement costs could be
high (i.e., high transaction costs)
• They could have a disproportionate effect
on income distribution
• They do not condemn the act of polluting
on purely moral grounds. It is okay to
pollute, provided on pays for it.
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• Firms are philosophically against taxes of any
form, especially when they are perceived to
cause increased prices and an uncertain
business environment.
• Environmental organizations generally oppose
effluent charges for both practical and
philosophical reasons. Pollution taxes are
“licenses to pollute”. Taxes are generally
difficult to tighten once implemented.
Transferable Emission Permits
• Essentially, the main idea behind transferable
emission permits is to create a market for
pollution rights. A pollution right simply
signifies a permit which consists of a unit
(pound, ton, etc.) of a specific pollutant.
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• In general, the system of transferable permit
operate on the basis of the following basic
postulates:
– it is possible to obtain legally sanctioned right to
pollute
– These rights (permits) are clearly defined
– The total number of permits and the initial
distribution of the total permits among the
various polluters are assigned by government
agencies. In addition, polluters emitting in
excess of their allowances are subject to a stiff
monetary penalty
– Pollution permits are freely transferable. That
is, they can be freely traded in the marketplace.
Transferable Pollution Permits in Theory
• Show how transferable permits work in
theory using the figure in the handout-Figure 6.4
Principal Advantages of emission Permits
• they are least interventionist
• they are are cost-effective, especially when
the number of parties involved in the
exchange of permits is large
• they provide observable prices for
environmental services
• they can be applied to a wide range of
environmental problems
Principal disadvantages of transferable
emission permits
• The mechanisms used to distribute permits
among potential users could have significant
equity implications.
• The idea of permits to pollute conveys, to
some, a reprehensible moral and ethical
value.
• The applicability is questionable for pollution
problems with an international scope.
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• They are ineffective when there are not
enough participants to make the market
function.
• Permits can be accumulated by firms for the
purpose of deterring entrants or by
environmental groups for the purpose of
attaining the groups’ environmental
objectives.
The Macroeconomic Effects of Environmental
Regulations
• Policies used to internalize environmental
externalities could have economic-wide
effects.
• These effects are suspected to appears in the
forms of general price increase (inflation) or
unemployment. {show how this would be
the case using a simple demand and supply
analysis}
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• Despite this, at the aggregate level, the
effects of environmental regulation on price
and unemployment are not that clear cut for
the following reasons:
– The economy-wide effect of environmental
regulation on unemployment is unclear since a
decrease in employment in certain sector of an
economy could be offset by a gain in other
sectors.
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– Furthermore, some even claim that cleaning up
the environment creates more jobs than it
destroys--since firms associated with pollution
control activities tend to be relatively more
labor intensive.
– In addition, some economists argued that
strictly enforced environmental policy could
have the effect of forcing firms to adopt more
efficient production technology--the Porter
Hypothesis.
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• On the other hand, it was argued that
environmental regulations have negative
effects on productivity (hence, aggregate
output and unemployment ) for the following
two reasons:
– Pollution control expenditures displace
investment in new plant and equipment, and
require firms to use some inputs for compliance,
hence adversely affecting the rate of increase in
labor productivity.
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– Furthermore, regulation is believed to increase
the uncertainty climate of private industry,
hence adversely affecting the level of industrywide investment.
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• At least in theory, the inflationary effect of
environmental regulation seems to be indisputable.
This is because environmental policy forces society
to take into account costs that would have
otherwise been neglected.
• However, several empirical evidence suggests that
the price effect of environmental regulation is very
minimal at the aggregate level.