Marketable permits for the prevention of environmental deterioration

This paper develops a modified system of marketable emission permits that promises both savings in abatement costs to sources and improved environmental quality relative to an initial command-and-control (CAC) outcome. Using a model of TSP emissions for the Baltimore Air Quality Control Region (AQCR), a series of simulation exercises indicates that such a permit system could generate large cost savings while inducing significant reductions in TSP concentrations as compared to the existing CAC regime in Baltimore.     

An Empirical Analysis of Exposure-Based Regulation to Abate Toxic Air Pollution

Title III of the 1990 Clean Air Act Amendments requires the Environmental Protection Agency to regulate 189 air toxics, including emissions from by-product coke ovens. Economists criticize the inefficiency of uniform standards, but Title III makes no provision for flexible regulatory instruments. Environmental health scientists suggest that population exposure, not necessarily ambient air quality, should motivate environmental air pollution policies. Using an engineering-economic model of the United States steel industry, we estimate that an exposure-based policy can achieve the same level of public health as coke oven emissions standards and can reduce compliance costs by up to 60.0%.     

Terminating links between emission trading programs

Links between emission trading programs are not immutable, as highlighted by New Jersey׳s exit from the Regional Greenhouse Gas Initiative in 2011. This raises the question of what to do with existing permits that are banked for future use—choices that have consequences for market behavior in advance of, or upon speculation about, delinking. We consider two delinking policies. One differentiates banked permits by origin, the other treats banked permits the same. We describe the price behavior and relative cost-effectiveness of each policy. Treating permits differently generally leads to higher costs, and may lead to price divergence, even with only speculation about delinking.     

Market design in cap and trade programs: Permit validity and compliance timing

Cap and trade programs have considerable heterogeneity in permit validity and compliance timing. For example, permits have different validities across time (e.g., banking, borrowing, and seasons) and space (e.g., zonal restrictions), and compliance timing can be annual, in overlapping cycles, or in multi-year periods. We discuss nine prominent cap and trade programs along these dimensions and construct a general model of permit validity and compliance timing. We derive sufficient conditions under which abatement is invariant to compliance timing, i.e., compliance timing cannot smooth abatement cost shocks. Under these conditions, (i) expected compliance costs are invariant, (ii) the variance of compliance costs increases with the delayed compliance, (iii) equilibrium prices may not be unique, and (iv) the delayed compliance equilibrium may rely on “degenerate” prices not determined by marginal abatement costs. We demonstrate the model's broad applicability by illustrating different types of temporal permit validity.     

The empirical properties of two classes of designs for transferable discharge permit markets

Previous work by Atkinson and Lewis (J. Environ. Econ. Manag.1, 237–250 (1974)) and Anderson et al. (“An Analysis of Alternative Policies for Attaining and Maintaining a Short-Term NO₂ Standard,” MATHTECH, Inc., Princeton, N.J., 1979) has indicated the tremendous cost advantages to be achieved by moving from a policy based on emission standards to one based on marketable emission permits. As Tietenberg (Land Econ.56, 391–416 (1980)) points out, however, neither of the major permit designs treated in the literature are optimal from all points of view. This has triggered a search for alternative permit designs, which, while they may not minimize compliance costs, have sufficient other virtues as to make them attractive on other grounds. The purpose of this paper is to examine, within the context of an empirical mathematical programming model, the air quality, emission, and cost consequences of two classes of the permit designs which can be implemented in the absence of information on control costs. This case study involves particulate control in St. Louis.     

Emission control policies under uncertainty

The paper deals with the problem of optimal environmental policy under uncertainty. Usually, when an environmental policy is considered, only the expected values of the parameters of the marginal benefit and marginal cost functions associated with the policy are known. Thus a relevant question is: In the presence of uncertainty, what is the optimal policy mean for achieving the environmental objective? The study addresses itself to the specific objective of improving air quality although the analysis is generally applicable. The policy means are emission taxes and emission quotas. It is shown that under uncertainty neither of these means is generally optimal, and that specific parameter values of the costs and benefits relations and their distributions determine the optimal policy for each situation.     

Air quality improvement in Los Angeles—perspectives for developing cities

Air quality improvement in Los Angeles can inform air quality policies in developing cities. Emission control efforts, their results, costs and health benefits are briefly summarized. Today's developing cities face new challenges including regional pollution. Air quality issues in Beijing are briefly compared and contrasted with Los Angeles. Opportunities for co-benefits for climate and air quality improvement are identified. Air quality improvement in Los Angeles, California is reviewed with an emphasis on aspects that may inform air quality policy formulation in developing cities. In the mid-twentieth century the air quality in Los Angeles was degraded to an extent comparable to the worst found in developing cities today; ozone exceeded 600 ppb and annual average particulate matter <10 mm reached ~150 mg·m⁻³. Today's air quality is much better due to very effective emission controls; e.g., modern automobiles emit about 1% of the hydrocarbons and carbon monoxide emitted by vehicles of 50 years ago. An overview is given of the emission control efforts in Los Angeles and their impact on ambient concentrations of primary and secondary pollutants; the costs and health benefits of these controls are briefly summarized. Today's developing cities have new challenges that are discussed: the effects of regional pollution transport are much greater in countries with very high population densities; often very large current populations must be supplied with goods and services even while economic development and air quality concerns are addressed; and many of currently developing cities are located in or close to the tropics where photochemical processing of pollution is expected to be more rapid than at higher latitudes. The air quality issues of Beijing are briefly compared and contrasted with those of Los Angeles, and the opportunities for co-benefits for climate and air quality improvement are pointed out.     

Carbon trading across sources and periods constrained by the Marrakesh Accords

We examine the potential effects on permit prices and abatement costs of four compliance rules governing emissions trade across sources and periods in the Kyoto Protocol: The banking rule that allows excess permits to be used later; the restoration rate rule that penalizes borrowing; the commitment period reserve rule that limits sales; and finally, the suspension rule that restricts borrowing and sales. Our framework is a two-period model where parties may be out of compliance in the Kyoto period, but are assumed to comply at a later time. Under varying assumptions about market power and US participation, we find that the rules may have pronounced effects on individual costs, but overall efficiency is not severely affected.     

Air pollution control costs and consumption pattern effects A regional analysis

The purpose of this study was to ascertain, through the use of an input-output model, the impact of air pollution control costs on income groups in the Philadelphia Region. The range of increases in consumption expenditure was found to be fairly narrow, with the middle-income group bearing the largest increase (2.9%) and the highest and lowest groups slightly lower increases (about 2%). This finding lends support to the proposition that all income groups would probably share the costs of control equally, which leads to a slightly regressive effect on income distribution. The sharing of the region's air quality costs by other areas was also analyzed.     

The regulation of a spatially heterogeneous externality: Tradable groundwater permits to protect streams

Groundwater pumping can reduce the flow of surface water in nearby streams. In the United States, recent awareness of this externality has led to intra- and inter-state conflict and rapidly-changing water management policies and institutions. Although the marginal damage of groundwater use on stream flows depends crucially on the location of pumping relative to streams, current regulations are generally uniform over space. We use a population data set of irrigation wells in the Nebraska portion of the Republican River Basin to analyze whether adopting spatially differentiated groundwater pumping regulations leads to significant reductions in farmer abatement costs and costs from damage to streams. We find that regulators can generate most of the potential savings in total social costs without accounting for spatial heterogeneity. However, if regulators need to increase the protection of streams significantly from current levels, spatially differentiated policies will yield sizable cost savings.     

A cost-effectiveness analysis of alternative air quality control strategies

A number of linear programming models purport to minimize the costs of emission control to achieve ambient air quality standards. Many of the simulations incorporate the simplifying assumption that improvements in ambient air quality are proportional to reductions in regional emissions. This approach minimizes the cost of mass emission reduction, but not the cost to achieve a prescribed ambient air quality. The costs of this emissions least-cost strategy are compared to an ambient least-cost strategy which does achieve prescribed ambient air quality at minimum cost. The cost saving achieved by this strategy relative to the emissions least-cost strategy is as much as 50670. In addition, both are compared to a strategy typical of those currently used by the states, which is found to be as much as ten times as expensive as the ambient least-cost strategy.     

The social welfare implications of industry self-auditing

The Environmental Protection Agency's (EPA's) audit policy authorizes reduced penalties for firms that voluntarily undertake compliance audits and then correct and report any discovered violations to the agency. While the EPA claims the policy is a success, this paper joins a growing literature in questioning that claim. A game-theoretic model of the audit policy is developed where the goal of enforcement is remediation and the agency is unable to commit to a pre-announced inspection policy. Self-auditing is beneficial because it permits both self-reporting and self-policing to occur; however additional costs are imposed on firms. Self-auditing is more likely to be socially beneficial when the damages caused by violations are large. The current audit policy explicitly excludes violations that result in serious actual or potential harm. When violations are small, as most current disclosures under the audit policy are, firm self-auditing is likely to increase social costs.     

On marketable air-pollution permits: The case for a system of pollution offsets

After examining the properties of several alternative forms of marketable permit systems for the control of air pollution, this paper proposes a system of pollution offsets as the most promising approach. Under the pollution-offset scheme, sources of emissions are free to trade emissions permits subject to the constraint of no violations of the predetermined air-quality standard at any receptor point. The paper shows that the pollution-offset system has the capacity to achieve the predetermined standards of air quality at the minimum aggregate abatement cost, while making comparatively modest demands both on the sources and on the administering agency.     

The implications of model complexity for environmental management

The purpose of this paper is to consider the implicatons of model complexity for the quality of the information provided by models of production activities that account for the processes involved in residuals generation and treatment. Using each of the three primary technologies for iron and steel-making industry and models of varying detail for each, the paper compares the estimated levels of residuals generated and treatment costs for both atmospheric and waterborne effluents. The findings suggest that there are strategic details in model construction which have fundamental implications for the design of environmental policies. Moreover, preliminary estimates of the costs of model construction and operation suggest that policymakers may not be able to afford complexity for its own sake. Rather these costs will require the development of methods to isolate the strategic details in each technology that are potentially important to environmental policies.     

An empirical analysis of economic strategies for controlling air pollution

In evaluating current environmental protection policy, economists often note that current regulations are more costly than necessary to meet environmental quality standards. While the a priori case is strong that current regulatory approaches are resulting in higher-than-necessary costs to attain environmental standards, there is relatively little empirical evidence to support this claim. The purpose of this paper is to supply some of the missing evidence by presenting the results of one study that assesses some of the potential savings associated with implementing economic, rather than command-and-control, regulatory approaches to abate one type of air pollution in one region of the country. Specifically, the paper examines the costs of meeting a prospective short-term standard for nitrogen dioxide under a range of alternative emissions control strategies for stationary sources of nitrogen oxide emissions in the Chicago Air Quality Control Region. The alternative strategies that are considered range from those that might result under current regulatory policy to those that economic policy approaches (such as emissions charges or marketable permits) are designed to implement. The analysis shows that the most efficient program of emissions controls may be more than an order of magnitude less costly than current regulatory strategies, and that economic approaches have additional advantages over more conventional regulatory approaches.     

Theoretically optimal environmental metrics and their surrogates

Many environmental pollutants are thought to produce several classes of effects, e.g., morbidity, mortality, property damage. It would be possible to specify a unique theoretically optimal metric for each class of effects. Alternatively a single surrogate metric could be used to represent the combined impact of all classes of effects. Here, the use of surrogates is discussed in the context of regulation of ambient air pollution. It is demonstrated that costs may be associated with the use of surrogates, and that these costs are caused by (1) imprecision in the relationships between the surrogate and each of the theoretically optimal metrics, and (2) reduction in dimensionality of the set of exposure metrics. The factors which govern the magnitude of costs incurred are explored. It is noted that any savings inherent in the operation of simplified systems of monitoring and data management offset to some degree the costs generated by the use of surrogates.     

A regional environmental quality management model: An assessment

The principal purpose of this paper is to discuss the research and policy lessons learned from a large environmental quality management model constructed for the Lower Delaware River Valley Region, The policy lessons involve estimates of the costs of meeting varying standards on air and water quality and the impact on those costs of certain region-wide management alternatives. The research lessons concern: (a) the desirability of considering air and water quality, and solid waste disposal, simultaneously in a single model; (b) the costs of and returns to including nonlinear models of natural systems in a regional optimization framework; and (c) the feasibility of working with constraints on the geographic distribution of the costs of environmental quality improvement within the regional, nonlinear model.     

Cap-and-trade properties under different hybrid scheme designs

This paper examines the key design mechanisms of existing and proposed cap-and-trade markets. First, it is shown that the hybrid systems under investigation (price floor using a minimum price guarantee, price collar, allowance reserve, options offered by the regulator, and offset relaxation) can be decomposed into a combination of an ordinary cap-and-trade scheme with European- or American-style call and put options. Then, we quantify and discuss the advantages and disadvantages of the proposed hybrid schemes by investigating whether pre-set objectives (enforcement of permit price bounds and reduction of the compliance costs for relevant companies) can be accomplished while maintaining the original environmental targets. Plain vanilla options are proposed as an alternative that reconciles the otherwise conflicting policy objectives.     

Achieving air pollutant emission reduction targets with minimum abatement costs: An enterprise-level allocation method with constraints of fairness and feasibility

• Quantification of efficiency and fairness of abatement allocation are optimized. • Allocation results are refined to the different abatement measures of enterprises. • Optimized allocation results reduce abatement costs and tap the abatement space. • Abatement suggestions are given to enterprises with different abatement quotas. For achieving air pollutant emission reduction targets, total pollutant amount control is being continuously promoted in China. However, the traditional pattern of pollutant emission reduction allocation regardless of economic cost often results in unreasonable emission reduction pathways, and industrial enterprises as the main implementers have to pay excessively high costs. Therefore, this study adopted economic efficiency as its main consideration, used specific emission reduction measures (ERMs) of industrial enterprises as minimum allocation units, and constructed an enterprise-level pollutant emission reduction allocation (EPERA) model with minimization of the total abatement cost (TAC) as the objective function, and fairness and feasibility as constraints for emission reduction allocation. Taking City M in China as an example, the EPERA model was used to construct a Pareto optimal frontier and obtain the optimal trade-off result. Results showed that under basic and strict emission reduction regulations, the TAC of the optimal trade-off point was reduced by 46.40% and 45.77%, respectively, in comparison with that achieved when only considering fairness, and the Gini coefficient was 0.26 and 0.31, respectively. The abatement target was attained with controllable cost and relatively fair and reasonable allocation. In addition, enterprises allocated different emission reduction quotas under different ERMs had specific characteristics that required targeted optimization of technology and equipment to enable them to achieve optimal emission reduction effects for the same abatement cost.     

Willingness to pay for clean air in China

We use a residential sorting model incorporating migration disutility to recover the implicit value of clean air in China. The model is estimated using China Population Census Data along with PM2.5 satellite data. Our study provides new evidence on the willingness to pay for air quality improvements in developing countries and is the first application of an equilibrium sorting model to the valuation of non-market amenities in China. We employ two instrumental variables based on coal-fired electricity generation and wind direction to address the endogeneity of local air pollution. Results suggest important differences between the residential sorting model and a conventional hedonic model, highlighting the role of moving costs and the discreteness of the choice set. Our sorting results indicate that the economic value of air quality improvement associated with a one-unit decline in PM2.5 concentration is up to $8.83 billion for all Chinese households in 2005.