Government Policies for Environmental Protection (c) 2010 by Peter Berck

Government Policies for Environmental Protection

(c) 2010 by Peter Berck

© 2011 Pearson Addison-Wesley. All rights reserved.

Public Health is the Reason

• To clean up.• Health depends on the breathed air

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Table 12.1: National Ambient Air Quality Standards Under the U.S. Clean Air Act.

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Where should the government regulate? Why?

• Ability to Observe• Multi media problem• Align Incentives• Provide Flexibility

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Figure 12.1: From Inputs to Damage.

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One Price for Pollution

• Requires One marginal benefit from abatement curve, not one for every place in the US

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Figure 12.2: Spatial Variation in Pollution.

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Sacred Cars

• NOx abatement by cars and power plants

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Figure 12.3: The Marginal Costs of Abating Nitrogen Oxides (NOx).

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Politics, yes that is the reason….

• But it is also the uncoordinated system• USEPA or CA/EPA/ARB controls car

emissions• States control Powerplant emissions• Outcome depends on a regulatory process with

TBES being set, plus New Source Performance Standards, etc.

• So not entirely Machiavelli

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Figure 12.4: Deadweight Loss When Standards Are Not Well Chosen.

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Table 12.2: Comparison of Command and Control Approaches.

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Let’s see a tax at work…

• We charge 45c/lb for NOx • Firm sets MCA(abate) = 45 cents/lb

– WHY?

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Figure 12.5: Using a Pollution Price to Reduce Pollution.

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Yeah, you knew that right?

• But have a gander at the magnitude of the tax take!

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Figure 12.6: Taxing Power Plants.

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Makes you long for metric

• 6 million tons x .93c per lb• 12,000 million lbs x $1 (close enough)• 12 billion dollars in tax take. • To get 6.7 billion dollars in abatement done• Wow: tax take is 2x cost of doing the job

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So suppose we do it with a subsidy for abatement

• US pays powerplants for their abatement instead of charging them for emissions

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Figure 12.7: Using a Subsidy to Reduce Pollution.

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So you gotta find 13 billion bucks

• Maybe that isn’t so crazy.– Industry takes your money and does the job– You don’t end up discussing it in court for 40 years

• But you will have to tax something to do it.– Deadweight loss of taxation = 16-25% or so of

amount, so figure a 16 billion bucks– Unless you can find an undertaxed bad, like – cars, and then you get a gain.

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Taxes have one more subtle advantage

• Over standards– Another black triangle

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Figure 12.8: The Incentive to Innovate.

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A bit of summary

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Table 12.3: Comparison of MBI Approaches.

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Table 12.4: Comparison of Standards to Market-Based Incentives.

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An Aside on Actual Policy: CWA

• Clean Water Act– Goal of NO emissions to water

• National Pollutant Discharge Elimination System. NPDES. A TBES program in which all who discharge must have permits.– Not enough to keep water clean– Too many permits

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The State Federal Dance

• States set “designated uses” like boat able and not necessarily drinkable.

• Once and if they set a use (or potentially but not really the Feds set one for them)– If don’t meet standard, states establish– Total Maximum Daily Loads of emissions– Then must regulate to make it so.

• But they hate doing this as it might mean regulating agriculture or further regulating point sources

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No real forcing mechanism

• In practice states aren’t made to regulate water– Missouri river has so much Nitrogen in it in

Montana that you can’t purify it or drink it on a canoe trip.

• From ? (before 1972) to 1980 CWA subsidized sewage treatment.– Worked– Killed off by left and right. (why the left was

against)

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Cheating and Bad Government: Chapter 13

• Firms cheat because of the money• Firms behave because of the expected

penalty

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Penalty

• 1. Government expends money on monitoring. Sends inspectors. Mounts devices. Hears citizen complaints.

• 2. Monitoring leads to probability of detecting cheating.

• 3. Once cheating is found it must be proved. Administrative law procedure.

• 4. Penalty is determined and firm pays

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• 5. Or firm litigates for a decade or two.

• Expected penalty = prob of being caught times fine if caught.

• ?Why did Macy’s open on Sundays when it was illegal?

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Figure 13.1: The Marginal Benefits of Polluting Curve for a Power Plant. (Again)

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A Standard backed by an expected penalty

• Emit more than the standard and we will find you and fine you

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Figure 13.2: Penalty Is Greater Than Benefits from Emitting.

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Lag regulatory climate

• Aka Houston Tx.

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Figure 13.3: Penalty Is Less Than Benefits from Emitting.

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Notice that the standard plays a different role here

• Isn’t important anymore. All the firm cares about is the penalty, which is a “tax” on emissions above standard.

• In practice there are also criminal penalties for plant managers who commit “intentional violations.”

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Are you a Goo goo?

• Like Fiorello Laguardia? (good government)• Many agencies responsible for banking system:

Federal Reserve, Sec. of Treas., Comptroller of the Currency, Fannie May and Freddie Mac.– Yet totally unpayable loans generated in the

billions/trillions for housing.

• Why did the regulators sleep (and who is Barney Frank and why is he partially guilty)

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Captive Regulators

• Stakeholder process• Fisheries Management Councils are

charged with regulating fishing.• They are made up of fishers and

processors plus some others• Will they be goo-goos?

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Captive regulators

• How many politicians did the big four own?*

• Where people right to be wary of the railroad “interests”

• *Someone name the big four.

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“voluntary” environmentalism

• Either regulate yourselves or the EPA will do it for you. (Eat a vegetable or your parents will choose which vegetable.)– Bargaining in the shadow of the law.

• TRI– Toxic release inventory– “Voluntary” sort of.– Top 10 punished in the market place

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