Firm incentives to promote technological change in pollution control: Reply

Our paper (Firm incentives to promote technological change in pollution control, J. Environ. Econom. Management 17, 247–265 (1989)) concluded that firms will most actively search for new abatement technology under taxes and auctioned permits. However, Marin (Firm incentives to promote technological change in pollution control: Comment, J. Environ. Econom. Management, 21, 297–300 (1991)) argues that we overstated the efficacy of auctioned permits: that we used an unrealistic assumption which might affect our findings; that auctions may misallocate permits and are administratively burdensome; and that innovation detection is difficult under this regime. Here we show that our results are largely unchanged when the assumption questioned by Marin is relaxed. We also argue that he overstates the other concerns.     

Tax versus emissions trading scheme in the long run

In this paper we compare the performance of emission taxes and tradable permits under free market entry when firms face idiosyncratic ex ante cost uncertainty. We show that under auctioned permits insufficient entry occurs, while under a linear emission tax scheme, depending on parameters, market entry can be either excessive or insufficient. Our long-run analysis thus contrasts with Spulber׳s (1985) equivalence result and also modifies Weitzman׳s result in favor of an ETS in that the superiority of a tax over an ETS is not guaranteed, even when the Weitzman condition favors a tax. We also show that an ETS is superior to a tax scheme when the entry cost is low and the magnitude of uncertainty/asymmetric information and the size of the output market are large.     

Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications

We consider a simulation of risk-averse producers when making investment decisions in a competitive energy market, who face uncertainty about future regulation of carbon dioxide emissions. Investments are made under regulatory uncertainty; then the regulatory state is revealed and producers realize returns. We consider anticipated taxes, grandfathered permits and auctioned permits and show that some anticipated policies increase investment in the relatively dirty technology. Beliefs about the policy instrument that will be used to price carbon may be as important as certainty that carbon will be priced. More generally, a failure to consider risk aversion may bias policy analysis for the power sector.     

Cost-effective environmental policy: implications of induced technological change

Cost-effective environmental policy generally requires that all emission sources are faced with the same tax. In this paper I discuss how the existence of induced technological change may alter this result, if at least some of the effect is external to the firm. Focusing on Learning by doing (LBD) effects in abatement activities, it is shown that emission sources with external learning effects should be faced with a higher tax than emission sources with only autonomous technological change. By using simple numerical simulations, it is further investigated to what degree a cost-effective climate policy differs from a free quota market, under various assumptions about learning effects, diffusion of technology and environmental targets. The results indicate that optimal taxes may be significantly higher in the industrial world than in the developing world. Moreover, the industrial world's share of global abatement may be much higher in a cost-effective solution than in a free quota market. The global cost savings of a fully flexible implementation of the Kyoto Protocol are further questioned, as potential spillover effects of technological growth in the industrial world are not internalised in the market.     

Enforcement costs and regulatory reform: The agency and firm response

Influenced by models of optimal law enforcement, several authors have recently revised the work on efficient levels of regulatory control to accommodate the realities of underenforcement and imperfect compliance. However, most of these efforts have centered on either the enforcement agency or the firm and have largely ignored the decentralized nature of the enforcement process. This paper extends these results by modelling both the firm and the local agency and by incorporating detection uncertainty and concealment activity. Each model is then evaluated with respect to the alternative regulatory regimes of direct controls and emission taxes.     

Markets and environmental management with a storable pollutant

Lee [J. Environ. Econ. Manag., in press] investigates possibilities where pollutants may be stored for a period of time and later released into the environment when adverse effects are minimal. The treatment and storage of pollutants before their release into the environment is a crucial part of many abatement programs. Surprisingly, emission charges will not induce optimal abatement when storage is possible. This occurs because the firms' response to the dynamic tax is indeterminant. We suggest alternative controls, whereby rights to emit pollutants are sold competitively and demonstrate that markets provide incentives for the optimal generation-storage-emission of pollution by firms. In deriving this result an important difference between markets and taxes is revealed. With markets there is still indeterminacy at the firm level, but the aggregate response of all firms is dictated by market forces that insure pollution is reduced by some desired amount.     

Firm incentives to promote technological change in pollution control: Comment

Following on from an analysis by Milliman and Prince, this article considers further the relative incentives for technical change provided by different pollution control instruments. The comments involve the recognition that emission targets are typically chosen fairly arbitrarily because of regulators' lack of knowledge of abatement cost schedules. There is also a more detailed discussion of the practicability of auctioning emissions permits, as these have been less thoroughly covered in the literature than the other instruments.     

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.     

Enforcement costs and the incentive to evade controls on production

Economists have long favored emission taxes as a method of controlling pollution. One reason for the widespread support of emission taxes has been the assumption that emission taxes would be easier to enforce than other policies. However, recent developments in the discussion of pollution control allow more specific comparisons of enforcement costs and yield the conclusion that there may exist at least one alternate regulatory scheme that would be easier to enforce than emission taxes.     

Stochastic pollution, costly sanctions, and optimality of emission permit banking

This paper identifies a new economic motive for pollution regulations that allow polluting firms to bank and borrow emission permits over time. When aggregate pollution is stochastic, an intertemporal permit trading regime can provide firms with efficient incentives for pollution abatement without the need for costly government enforcement actions that would otherwise be required.     

Cost-Effective Policies to Improve Urban Air Quality in Santiago, Chile

This paper examines the applicability of market-based incentives for controlling emissions of particulate matter from fixed sources, in a developing-country context. It uses Santiago, Chile as a case study. A linear programming model has been developed to establish the costs of achieving different air quality targets using marketable permits and command-and-control (CAC) policies. The main conclusion is that an ambient permit system (APS) substantially reduces compliance costs of achieving a given air quality target at each receptor location in the city. Consequently, the use of permits is warranted. However, spatial differentiation of permits is required, thus complicating the design and use of such an instrument. Moreover, the reduction in compliance costs under APS is significantly less when the air quality targets imposed for each receptor location are the same as those achieved by other CAC 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.     

Stochastic Pollution, Permits, and Merger Incentives

Pollution permit regulations introduce nonlinearities into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production. We also demonstrate that permit management incentives may motivate a merger of otherwise independent firms. Incentives to petition for “bubble” coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situations in the output and permit markets are also analyzed.     

Environmental Policy and International Trade when Governments and Producers Act Strategically

Some environmentalists express concern that trade liberalization may damage the environment by giving governments incentives to relax environmental policies to give domestic producers a competitive advantage. Support for such concern may be given by models of imperfectly competitive trade where there may be “rent-shifting” incentives for governments to relax environmental policies. But there are also incentives for producers to act strategically, e.g., through their investment in R&D, and in this paper I extend the literature on strategic environmental policy by allowing for strategic behavior by producers as well as governments. I show that (i) allowing for producers to act strategically on balance reduces the incentive for governments to act strategically; (ii) allowing governments to act strategically increases the incentive for producers to act strategically; (iii) welfare is lower when both parties act strategically; and (iv) strategic behavior by producers and governments is greater when governments use emission taxes than when they use emission standards.     

Alternative policy instruments under uncertainty: A programming model of toxic pollution control

This paper presents the results of a programming model which examines the relative performance of different regulatory regimes under uncertainty in controlling toxic wastes discharged by industry to a central treatment plant when the central is subject to threshold-type losses in treatment performance. Four regulatory regimes are examined: non-market quantity, price, marketable permit, and mixed price-quantity. The theoretical framework of the model is based on the analysis of prices vs quantities by Weitzman in 1974 and its extension to the case of a discontinuous threshold effect. The data used are based on the situation of Bridgeport, Connecticut, which has a number of metal finishing firms.     

Climate and international trade policies when emissions affect production possibilities

In this paper, we develop a model of international trade and climate change in which emission discharges arising from production have a feedback effect on national production sectors by impacting upon effective factor endowments. With this context, the objectives are, first, to provide a general characterization of Pareto-efficient climate and trade policies and, second, to examine the possibility – starting from non-Pareto-efficient equilibria – for Pareto-improving environmental policies. We provide conditions under which several particular reforms of carbon taxes are welfare improving.     

Estimation of the cost of air pollution control regulation

Estimates of hydrocarbon pollution control costs under the alternative regulatory approaches of individual source or process standards, plant standards, and regionally marketable permits are presented. The estimates are obtained from data supplied by the DuPont Company based on a 1976 in-house engineering study. The estimation procedure is unique in that the data are based on uniform percentage control across sources while the estimated cost equations allow variable control at each source. The cost simulations show that considerable cost savings are available from allowing firms more flexibility in meeting a given environmental standard. The effect of plant relocation and monopoly in the pollution permit market are also investigated.     

Technological influences and abatement strategies for industrial sulphur dioxide in China

Industrial SO₂ is the most important air pollutant in China. This paper outlines the technological impacts on industrial SO₂ emissions in China in terms of: amount, intensity, structure of energy consumption and structure of energy-intensive industries. It shows that industrial SO₂ emissions have linear growth alongside increases in energy consumption, particularly the rise in coal consumption. The contribution of technological factors to decreases in the intensity of energy consumption is 25%, while the structural factor is 75%. The power industry accounts for 52.6% of total industrial SO₂. Optimisation of the structure of energy consumption can reduce SO₂ emissions by 1.98 million tonnes per year. We propose the following technological strategies for industrial SO₂ abatement: adjustment of the system and structure of thermal power generating units, acceleration of flue gas desulphurisation projects, transformation of industrial structures, development of eco-industries and a reduction in energy consumption per unit product. In addition, an effective way to abate industrial SO₂ emissions is to promote governance strategies to stricly enforce SO₂ emission standards, conduct emission trading, and formulate incentives for encouraging cleaner production and clean energy development.     

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.     

Stochastic bycatch, informational asymmetry, and discarding

The existing literature (i) examines bycatch and discard behavior in a static framework and (ii) treats bycatch as a deterministic process uniform across vessels. Using a dynamic representative agent model in a two-stock resource, this paper explores strategic interactions between a social planner and two groups of harvesters, one of which imposes a stochastic “technological externality” (bycatch) on the other. In addition to limitations on entry and the number of trips taken in each industry, three bycatch control instruments are compared to the unconstrained case: taxes, trip limits, and value-based quotas. Implementation and enforcement costs aside, taxes dominate both types of quota, and value limits outperform trip limits by eliminating one type of discarding. In simulations, relative performance depends upon variance in the bycatch process, differences in the ex vessel prices of stocks, relative efficiency of the harvester types, and fixed costs on the trip and industry margins.