Transcript Week 6

Class 8
a) Atmosphere &
b) Environment and GDP
http://www.agecon.purdue.edu/staff/shively/courses/AGEC406/index.htm
AGEC/FNR 406
LECTURE 18
What the ozone hole looks like to a statistician!
Atmospheric Change
Two major issues
1. Ozone depletion in stratosphere
2. Global warming and climate change
Stock vs. Fund Pollutants
1. Fund pollutants: environment has
some assimilative capacity
2. Stock pollutants: environment has
little or no assimilative capacity
Economic importance is that stock pollutants
continue to accumulate or are persistent:
the problem is dynamic not static
Issues in atmospheric change:
1. Activities affect basic chemistry
2. Pollutants accumulate
3. Effects are global
4. Economic impacts may be severe
5. Consequences are uncertain
Ozone depletion
Main issue:
Ozone in stratosphere blocks UV
Depletion of ozone was predicted in 1974
Depletion was first observed in 1985
More UV means…
- skin cancer
- lower agricultural yields
- mutation in phytoplankton
Ozone hole
1. Annual variation normal
2. Less ozone now
Source: British Antarctic Survey, data online at
http://www.antarctica.ac.uk/met/jds/ozone/data/ZOZ5699.DAT
Ozone depletion: main cause
Main cause of ozone depletion is worldwide
use of fluorocarbons, especially
cholorofluorocarbons (CFCs).
CFCs are:
catalysts to convert O3 (“ozone”) to O2
inert, and therefore persistent
CFCs: main uses
Refrigeration
Air conditioning
Spray propellants
Foam production
Solvents
Ubiquitous in industry and consumer products
in 1960s, 70s, and 80s.
Main benefit: inert
Ozone depletion: consequences
1. More UV transmission
2. CFCs are greenhouse gases and
therefore increase global warming
3. Less ozone has a cooling effect and
therefore mitigates global warming
Net effect on global warming ambiguous,
but other negative effects are clear.
Ozone depletion: policy context
$
MDF
The optimal level is
near zero, so a ban
is likely to be an
efficient approach.
MAC
CFC emissions
Montreal Protocol
1987 agreement signed by most nations
amended in 1990 and 1992
Called for complete elimination of CFCs:
- in industrialized countries by 1996
(done)
- in developing countries by 2006
(still in progress)
CFC replacements
(hydrochloroflurocarbons)
Two issues:
1. HCFCs are also ozone depleting
2. Economic incentives to develop
recovery systems
but… since CFCs are still available in less
developed countries, an incentive for illegal
importation exists.
What Progress?
“Perhaps the single most successful international
agreement to date has been the Montreal Protocol.”
- Kofi Annan, Secretary General of the United Nations
But…according to NASA, from September 21-30, 2006 the
average area of the ozone hole was the largest ever
observed, at 10.6 million square miles.
For more information, visit:
http://www.theozonehole.com/montreal.htm
www.atm.ch.cam.ac.uk/tour/
and
www.ciesin.org/TG/PI/POLICY/montpro.html
Acid Rain
Name derives from a chemical reaction between
SO2 (sulfur dioxide)
NO2 (nitrogen dioxide)
and
H2O (water)
Reaction leads to...
Creation of sulfuric and nitric acid,
which fall in the form of acidified rain
(or snow or sleet).
There are actually two forms of acid
deposition:
1. wet deposition
2. dry deposition
http://www.epa.gov/airtrends/sulfur.html
http://www.epa.gov/air/emissions/so2.htm
Acid Deposition (Acid Rain)
• Regional Pollutant
– Effects felt over a broad geographic area.
– Location important: Effects felt downwind of source.
• Transboundary pollutant
– Emitted in one country and transported across a national border to
another country.
 U.S. sulfur dioxide emissions responsible for 50-75% of acid
deposition over most of eastern Canada.
 Canada sulfur dioxide emissions responsible for < 5% of acid
deposition in the U.S.
Acid rain impacts
1. Aquatic systems (-)
2. Forests (-)
3. Human health (-)
4. Visibility (-)
5. Agriculture (- /+)
6. Building materials (-)
Example
Travel $250
Cost
P = 250 -5Q
$200
P = 200 -5Q
0
0
50
40
Number of visits
Damage =
Loss in
consumer
surplus.
Damage and cost assessment
Main issues:
1. Market and non-market effects
2. Chemical synergies + metals
3. “Common metric” problem
Measurement and quantification of MAC
is difficult due to interdependencies.
Who benefits? Who should pay?
Actual policy in U.S.
1970-1990
- uncertainty prevailed
- Reagan administration stalled
- EPA regulations focused on local effects
which may have exacerbated problem
1990-present
- Clean Air Act: marketable permits (1990)
- NOXexcluded, 1-1 trading ignores location
- SO2 falling but NO2 increasing
Why so long?
Political concern regarding job losses
in coal-producing states (IN, IL, MI, OH)
Local losses in high-sulfur coal states
would be balanced by gains in low-sulfur
coal states
Costs of electricity would rise
Marketable Permits: Allowances
• Emission standard set and number of
permits determined.
• Permits issued to polluters based on some
allocation system.
• Polluters allowed to trade permits.
• Market should develop…
Why does trading work?
1. If firm can cleanup at a price lower
than the permit price, it will.
• Low MAC firms sell permits
2. If cleanup is costly then a firm will
choose to buy a permit
• High MAC firms buy permits
3. Anyone who wants to can buy a
permit.
GDP
What doesn’t GDP measure?
Non-marketed services are excluded
Does not accounts for depreciation of
natural capital
Example: Exxon Valdez oil spill
Three types of capital
1. Human
2. Human made
3. Natural
The key issue from an environmental
standpoint is whether these different
forms of capital can be substituted
Alternatives to GDP
1. Net National Product (NNP)
or Green GDP (gGDP)
Accounts for depreciation of natural
capital.
2. Index of environmental indicators
Accounts for the fact that many benefits
from environmental improvements are
not accounted for in market transactions
International aspects of the environment
1. International public goods
2. Transfrontier pollution
3. Impact of environmental policy on trade
4. Impact of trade policy on environment
Global public goods
Similar to national or local public goods:
nonexcludable and nonrival in consumption,
but production and consumption are separated
by political border.
Examples:
The atmosphere and outer space
Disease prevention
Ecosystem services
Transfrontier Pollution
Pollution that crosses an international
political boundary
Examples:
Acid Rain
Smoke from fires
Water pollution in major
river systems
Important because applying economic
incentives may be difficult -- but some hope for
solutions based on tradable permits.
Environmental Policy and Trade
Main concern is that a country’s
environmental policies will reduce the
country’s competitiveness and reduce its
volume of exports.
Three main linkages:
1. Cost of production
2. Incentives for relocation
3. Export of “green technologies”
Trade Policy and the Environment
Trade policy is generally designed to
promote exports and imports without
regard to conditions of production. This
often has the effect of undermining
environmental goals (both domestic and
international).
Trade Alliances
North American Free Trade Agreement
(NAFTA)
US + Mexico + Canada
General Agreement on Trade and Tariffs
(GATT)
Includes most countries
Why are Trade Alliances Important?
They often specify that “unfair” barriers
cannot be used to protect a country against
imports.
WTO has generally held restrictions on
environmental grounds to be unfair.
Examples: U.S. attempted tuna ban from
Mexico (w/o “dolphin friendly” practices)
Conflict resolution?
Free trade and environmental policies are
both beneficial.
A potential compromise would be to
establish an international board to review
cases and separate reasonable
environmental barriers from phony
barriers.