Transcript 14b.International_Macro

Macroeconomics and
International Economics
How can macroeconomic & international
policy affect the environment?
Questions on income…
Why are oil refineries in poor areas?
Why do poor countries have weak
environmental regulations?
Can we expect environmental
regulations to weaken or tighten over
time in the US or any country?
[Similar questions as when we
considered environmental justice.]
The income effect
Recall economic theory: Income (Y) is
an argument of demand
If consumption of a good:
Increases with increased Y, normal good
Decreases with increased Y, inferior good
Environmental Kuznet’s curve
Pollution is first (+) correlated with income,
then (-) correlated.
Individual to societal demand
How translate individual demands into societal
demand and government policy?
Aggregate individual demands, translate into
government demand
Think of environmental quality as a public good
Level of provision depends on form of government.
Democracy more likely to provide public goods?
What is “supply of environmental quality”?
What is “demand for environmental quality”?
Demand and supply for
environmental quality
Demand: value to consumers
How consumers value (are willing to pay
for) things like clean air, clean water,
biodiversity, ecosystem services, (non)-use
values.
Supply: cost to provide
Richer economies may have larger
industrial base, increasing MC of providing
environmental quality (not necessarily)
Interaction of supply and demand
Both supply and demand may shift
when incomes in a country increase.
$
S1
S0
Drawn this way,
environmental
quality increases
with increased Y.
D1
Q0 Q1
D0
Environmental Quality
But environmental quality may
decline
S1
$
S0
Q1 Q0
Drawn this way,
environmental
quality decreases
with increased Y.
D0 D1
Environmental Quality
Environmental Kuznet’s Curve – an
empirical relationship?
Emissions
Early phases of economic
growth tend to increase pollution
As income rises, clean
environment is valued
more, pollution declines
Income
Safe water vs. income
% w/o
safe
water
Regression analysis on 86
Countries from around the world
Shows improvement in drinking
Water quality with increased Y.
Income
Why are we studying this?
How to improve environmental quality in
poor countries?
Could focus international effort on protecting
resources, improving environment directly
If we believe Kuznet’s curve, could focus
attention on increasing incomes of poor
people, who will then demand increased
environmental quality.
Insufficient data to be certain about outcome.
Transboundary pollution
Pollution that migrates beyond
jurisdiction of source.
GHGs, SO2 (acid rain), water pollution,
some biodiversity loss, exotic species.
Possible policy instruments
Tariffs, standards for cleanliness,
international environmental agreements,
non-targeted international agreements.
GATT and the Environment
GATT (General Agreement on Tariffs and Trade)
says:
You can place border restrictions on the quality of a
product (e.g., no chunks of Flipper in the can of tuna)
You cannot place restrictions on how the product was
produced (you cannot prohibit use of hormones in raising
beef if no hormones can be detected in the imported beef)
Allows environmental restrictions (e.g., protecting
dolphins) if the restriction allows country to choose
methods that provide equal levels of environmental
protection – i.e., not technology standards
What are the reasons for these rules?
Do they work in providing environmental protection?
Desirable Attributes of a Successful IEA
Create an aggregate net benefit to participants
overall gross benefits > overall gross costs
Distribute the aggregate gain among participants
For each participant, benefits > costs (individual rationality)
Self-interest important in convincing country to agree
Deter non-participation
Must make it undesirable to remain outside agreement
Trade sanctions most frequently used
Design net benefits in > net benefits out (participation constraint)
Deter cheating among participants
Penalties must be credible
Trade sanctions are easiest to use
Deter entry of new non-participants (avoid “leakage”)
Particularly appropriate for common property problems
Saving a fishery increases rents and may induce non-fishing countries to
enter
Montreal Protocol
Designed for CFC’s leading to Ozone Depletion
Quantitative emission limits
for industrial, transition and
developing countries
Industrial countries pay for
added costs to developing
countries
Trade sanctions for nonparticipants and violators
Initial protocol modest;
gradually tightened over 10year period
Ozone Levels Projected
Source: World Met Org
UN Framework Convention on Climate
Change – Kyoto Protocol
Emerged from Rio Conference in 1992
US signed and ratified UNFCCC
Modeled after Montreal Protocol
Kyoto Protocol (1997) defines emission
reductions for Annex I (developed) countries
Developing countries largely exempt
Penalties for noncompliance missing
Environmental charges & funds
Central & East Europe (planned
economies): high pollution last few
decades
Attract limited international capital
Instituted some environmental taxes
But no bite until decentralized
Poland: careful CBA to attract debt-fornature, unusually successful
Planned economy emissions fees
Sulfur, NOx, carbon, some particulates,
lead
Transportation tolls
Water extraction charges, water
pollution fines, waste management
fees, fertilizer and pesticide fees
Regulations in China
Most populous, one of poorest, one of
most polluted countries
1979 law allows charging for pollution,
by 1994 $2 billion collected.
Fees charged when emissions above max.
Fees too low to achieve standards.
Fees in Rio Negro, Colombia
Colombian economy growing quickly
Water/air pollution major problems
1993 law that environmental damages
must be taken into account
Stipulates use of economic instruments
Fees implemented: 28% decline in
pollution in first 6 months
Voluntary emissions control in Mexico
Informal sector in Mexico: brick making
Difficult to monitor, regulate (similar to
non-point source pollution)
20,000 brick kilns burn nasty stuff
Too difficult to enforce ban on dirty fuels
Subsidize propane, voluntary switch
Zoning for certain activities
Involve local grassroots
Info & institutions: Indonesia
Rapid economic growth – drastic exploitation
of resources
“Program for Pollution Control Evaluation and
Rating” (PROPER) – similar to TRI
Reporting, evaluating, assisting firms
Grades each industry, reports in press
Very successful
Other countries have adopted similar (Mexico,
Philippines, Papua New Guinea)…
Green national accounting
Measures of national income: GNP, GDP
Don’t account for environmental
degradation and resource depletion
Can give misleading measure of
national “well-being”, may lead to
wrong policy.
Many adjustments have been proposed
to “correct” standard measures.
“Natural capital” depreciation
Natural capital: the available endowment
of land and natural resources
Measure depletion of natural resources
(oil, timber, minerals, soils)
Subtract from standard measures
Result: many developing nations show
substantial effect
Indonesia example: “Adjusted
Net Domestic Product”
Paying for public goods
Public goods will be under-provided,
externalities will not be internalized in free
market.
Government intervention: tax revenues can pay
for cleanup, regulation, public goods provision
But many taxes “distortionary”
Create a deadweight loss (DWL) to economy
E.g. Income tax discourages work!
Costs $1.40 to raise $1 in revenue
Double dividend
If we substitute distortionary taxes with
pollution taxes, we may earn a “double
dividend”
Reduce pollution (and therefore damage
from pollution)
Reduce distortionary taxes on labor and
thus the DWL from those taxes
• This is called the “revenue recycling effect”
A 3rd effect of pollution taxes
“Tax interaction effect”
If polluting good and leisure are substitutes
• Sunday drive might be a substitute for Sunday bike ride
Tax pollution, demand for leisure shifts out
If labor is still taxed, shift introduces an additional DWL
attributed to decrease in pollution
This DWL decreases social welfare.
Overall size of tax interaction effect varies among
polluting industries
One Estimate: pollution tax should be set at 63% of
marginal damage.