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.     

Using a sub-grid scale modeling approach to simulate the transport and fate of toxic air pollutants

Several air toxics are emitted from mobile sources on roadways and these emissions account for a significant fraction of the health risks to the population. In addition, health effect studies are now becoming more comprehensive and some account for the spatial heterogeneities of air pollutant concentration fields (as is the case near roadways). Standard models can simulate either the near-source concentration fields or the urban background, but no model can handle both spatial scales in the vicinity of roadways in a coherent and scientifically correct manner. Here, we present a model that provides such an integrated treatment by combining a grid-based air quality model of the urban background with a plume-in-grid representation of roadway emissions. The model is applied to simulate near-roadway concentrations due to emissions from a busy interstate highway in New York City. Qualitative comparisons with typical measured concentration profiles show that the model captures the observed features of toxic air pollutant concentrations near roadways.     

Benefits and challenges of streamlined life-cycle assessment for SMEs – findings from case studies on climate change impacts

ABSTRACT

Small and medium-sized enterprises (SMEs) have a substantial role in the economy and job creation, but they are a remarkable source of environmental impacts. SMEs often lack skills and resources to compile environmental impact assessments; Streamlined Life Cycle Analysis (LCA) can provide efficient tools for this. An application of streamlined LCA relying heavily on database data, LCA clinic, was developed and tested on 23 SMEs in Finland. The climate change impacts were mainly caused by the production of raw materials, electricity and heating, whereas packaging and transportation were not influential. A significant amount of emissions were indirect, i.e. caused by production of raw materials. Thus, decreasing emissions from raw material production or selecting raw materials with a smaller environmental load could be a more efficient way to decrease emissions than reducing direct emissions such as those from electricity use. Lack of data in the LCA-databases was considered a challenge. An access to regionally customised datasets is important for the implementation of LCA clinics. Company feedback indicated that LCA clinics were useful in climate-friendly product design and increased environmental awareness, but did not lead to immediate actions to reduce emissions because of inadequate investment capabilities. Company managers had limited possibilities to use the results in marketing as comparative assessments would require a full LCA. Many company managers were willing to pay a fee sufficient to cover the costs of an LCA clinic, but some considered that the costs should be covered by external funding sources.     

The Optimal Allocation of Conservation Funds

This paper presents a framework to evaluate alternative designs of conservation programs and their implications for the allocation of conservation funds. We show that the efficient allocation of conservation funds must consider two important “pooling” effects—cumulative effects and interrelationships among alternative environmental benefits. Ignoring the cumulative effects of environmental benefits may cause conservation funds to be overly dispersed geographically and, as a result, may result in minimum environmental benefits when the budget is small. Ignoring the interrelationships among alternative environmental benefits may result in not only misallocation of conservation funds among geographical areas, but also incorrect resources being targeted for conservation practices. Implications of these results for the design of conservation programs are discussed.     

Flattening the carbon extraction path in unilateral cost-effective action

Internalizing the global negative externality of carbon emissions requires the flattening of the extraction path of world fossil energy resources (=world carbon emissions). We consider governments with sign-unconstrained emission taxes at their disposal and seeking to prevent world emissions from exceeding some binding aggregate emission ceiling in the medium term. Such a ceiling policy can be carried out either in full cooperation or by a sub-global climate coalition. Unilateral action has to cope with carbon leakage and high costs, which makes a strong case for choosing a policy that implements the ceiling in a cost-effective way. In a two-country, two-period general equilibrium model with a non-renewable fossil-energy resource, we characterize the unilateral cost-effective ceiling policy and compare it with its fully cooperative counterpart. We show that with full cooperation there exists a cost-effective ceiling policy in which only first-period emissions are taxed at a rate that is uniform across countries. In contrast, the cost-effective ceiling policy of a sub-global climate coalition is characterized by emission regulation in both periods. The share of the total stock of energy resources owned by the sub-global climate coalition turns out to be a decisive determinant of the sign and magnitude of unilateral cost-effective taxes.     

Regulation with direct benefits of information disclosure and imperfect monitoring

We model the optimal design of programs requiring heterogeneous firms to disclose harmful emissions when disclosure yields both direct and indirect benefits. The indirect benefit arises from the internalization of social costs and resulting reduction in emissions. The direct benefit results from the disclosure of previously private information which is valuable to potentially harmed parties. Previous theoretical and empirical analyses of such programs restrict attention to the former benefit while the stated motivation for such programs highlights the latter benefit. When disclosure yields both direct and indirect benefits, policymakers face a tradeoff between inducing truthful self-reporting and deterring emissions. Internalizing the social costs of emissions, such as through an emissions tax, will deter emissions, but may also reduce incentives for firms to truthfully report their emissions.     

Strategic pollution control and capital tax competition

In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition.     

Incentives and prices in an emissions trading scheme with updating

Emissions trading schemes where allocations are based on updated baseline emissions give firms less incentive to reduce emissions for a given quota (or allowance) price. Nevertheless, according to Böhringer and Lange [On the design of optimal grandfathering schemes for emission allowances, Europ. Econ. Rev. 49 (2005) 2041–2055], such allocation schemes are cost-effective if the system is closed and allocation rules are identical across firms. In this paper, we show that the cost-effective solution may be infeasible if marginal abatement costs grow too fast. Moreover, if a price cap or banking/borrowing is introduced, the abatement profile is no longer the same as in the case with an auction (or lump-sum allocation). In addition, we show that with allocation based on updated emissions, the quota price will always exceed marginal abatement costs, possibly misguiding policy makers and investors about abatement costs. Numerical simulations indicate that the quota price most likely will be several times higher than marginal abatement costs, unless a significant share of allowances is auctioned.     

A laboratory study of auctions for reducing non-point source pollution

Non-point source pollution, such as nutrient runoff to waterways from agricultural production, is an environmental problem that typically involves asymmetric information. Land use changes to reduce pollution incur opportunity costs that are privately known to landholders, but these changes provide environmental benefits that may be more accurately estimated by regulators. This paper reports a testbed laboratory experiment in which landholder/sellers in sealed-offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize abatement. In one treatment the regulator reveals to landholders the environmental benefits estimated for their projects, and in another treatment the regulator conceals the potential projects’ “environmental quality.” The results show that sellers’ offers misrepresent their costs more for high-quality projects when quality is revealed, so total abatement is lower and seller profits are higher when landholders know their projects’ environmental benefits. This suggests that concealing this information may improve regulatory efficiency.     

Robust technology policy against emission leakage: The case of upstream subsidies

Asymmetric regulation of a global pollutant between countries can alter the competitiveness of industries and lead to emissions leakage, which hampers countries’ welfare. In order to limit leakage, governments consider supporting domestic trade-exposed firms by subsidizing their investments in abatement technology. The suppliers of such technologies tend to be less than perfectly competitive, particularly when both emissions regulations and advanced technologies are new. In this context of twin market failures, we consider the relative effects and desirability of subsidies for abatement technology. We find a more robust recommendation for upstream subsidies than for downstream subsidies. Downstream subsidies tend to increase global abatement technology prices, reduce pollution abatement abroad and increase emission leakage. On the contrary, upstream subsidies reduce abatement technology prices, and hence also emissions leakage.     

Key role for nuclear energy in global biodiversity conservation

Modern society uses massive amounts of energy. Usage rises as population and affluence increase, and energy production and use often have an impact on biodiversity or natural areas. To avoid a business‐as‐usual dependence on coal, oil, and gas over the coming decades, society must map out a future energy mix that incorporates alternative sources. This exercise can lead to radically different opinions on what a sustainable energy portfolio might entail, so an objective assessment of the relative costs and benefits of different energy sources is required. We evaluated the land use, emissions, climate, and cost implications of 3 published but divergent storylines for future energy production, none of which was optimal for all environmental and economic indicators. Using multicriteria decision‐making analysis, we ranked 7 major electricity‐generation sources (coal, gas, nuclear, biomass, hydro, wind, and solar) based on costs and benefits and tested the sensitivity of the rankings to biases stemming from contrasting philosophical ideals. Irrespective of weightings, nuclear and wind energy had the highest benefit‐to‐cost ratio. Although the environmental movement has historically rejected the nuclear energy option, new‐generation reactor technologies that fully recycle waste and incorporate passive safety systems might resolve their concerns and ought to be more widely understood. Because there is no perfect energy source however, conservation professionals ultimately need to take an evidence‐based approach to consider carefully the integrated effects of energy mixes on biodiversity conservation. Trade‐offs and compromises are inevitable and require advocating energy mixes that minimize net environmental damage. Society cannot afford to risk wholesale failure to address energy‐related biodiversity impacts because of preconceived notions and ideals.     

The optimal pricing of pollution when enforcement is costly

We consider the pricing of a uniformly mixed pollutant with a model of optimal, possibly firm-specific, emissions taxes and their enforcement under incomplete information about firms’ abatement costs, enforcement costs, and pollution damage. We argue that optimality requires an enforcement strategy that induces full compliance by every firm, except possibly when a regulator can base the probabilities of detecting individual violations on observable correlates of violators’ actual emissions. Moreover, optimality requires discriminatory taxes, except when a regulator is unable to use observable firm-level characteristics to gain some information about the variation in firms’ abatement costs or monitoring costs.     

When is a Life Too Costly to Save? The Evidence from U.S. Environmental Regulations

Under certain environmental statutes the EPA is required to balance costs and benefits in setting standards, whereas under others this is prohibited. This paper examines EPA regulatory decisions made under three statues, two of which require balancing and one of which does not. Using discrete choice models, we find that costs and benefits are significant explanatory variables for all three sets of decisions. This suggests that balancing occurred in each case; however, the value (implicit in these decisions) of avoiding a cancer case varies widely. We also find that a 1987 court ruling effectively curtailed whatever balancing occurred under the statute that prohibited it.     

Alternative transportation fuel standards: Welfare effects and climate benefits

This paper develops an integrated model of the fuel and agricultural sectors to analyze the welfare and greenhouse gas emission (GHG) effects of the existing Renewable Fuel Standard (RFS), a Low Carbon Fuel Standard (LCFS) and a carbon price policy. The conceptual framework shows that these policies differ in the incentives they create for the consumption and mix of different types of biofuels and in their effects on food and fuel prices and GHG emissions. We also simulate the welfare and GHG effects of these three policies which are normalized to achieve the same level of US GHG emissions. By promoting greater production of food-crop based biofuels, the RFS is found to lead to a larger reduction in fossil fuel use but also a larger increase in food prices and a smaller reduction in global GHG emissions compared to the LCFS and carbon tax. All three policies increase US social welfare compared to a no-biofuel baseline scenario due to improved terms-of-trade, even when environmental benefits are excluded; global social welfare increases with a carbon tax but decreases with the RFS and LCFS due to the efficiency costs imposed by these policies, even after including the benefits of mitigating GHG emissions.     

Has Economic Research Answered the Needs of Environmental Policy?

Efficient environmental regulation requires empirical estimates of the benefits and costs of environmental standards and policies. In the last 25 years, economists have made considerable progress in developing methods for measuring environmental benefits and in providing empirical estimates of costs and benefits. This paper reviews this progress. It examines by category of benefit the advancements made in providing estimates that can be used in benefit-cost analyses and identifies areas where additional research is required.     

The environmental effects of trade within and across sectors

This paper presents a model that combines within and across sector channels through which trade affects our environment by embedding heterogeneous firms and fixed costs into a two-sector framework with an endogenous response to environmental policy. In contrast to existing literature that tends to examine these channels separately, the combined framework developed here shows how cross-sector comparative advantage and within-sector responses to trade and environmental policy or factor endowments interact to affect our environment through three channels: changes in output, cross-sector market share, and emissions intensity. In contrast to a single-sector model with neutral productivity, consideration of two sectors allows for trade liberalization to affect the allocation of inputs in each sector and thereby affect total pollution output. The additional consideration of heterogeneous firm responses to falling trade costs will generate endogenous increases in productivity that increase output, reduce aggregate emissions intensity, and moderate the cross-sector resource adjustment, relative to a representative-firm model. Simulation results show how the combined framework can replicate existing empirical outcomes, and provide concise ceteris paribus insights regarding the potential role of trade and environmental policy changes and factor expansion in driving observed outcomes and their contribution to each of the three channels.     

Do renewable energy policies reduce carbon emissions? On caps and inter-industry leakage

In a parsimonious two-sector general equilibrium model, we challenge the widely-held tenet that within a cap-and-trade system renewable energy policies have no effect on carbon emissions. If the cap does not capture all sectors, we demonstrate that variations of a renewable energy subsidy change aggregate carbon emissions through an inter-industry leakage effect. We decompose this effect into intuitively intelligible components that depend in natural ways on measurable elasticity parameters. Raising the subsidy always reduces emissions if funded by a lump-sum tax, reinforcing recent findings that tightening environmental regulation can cause negative leakage. However, if the subsidy is funded by a levy on electricity, it can increase emissions. These results provide a valuable basis for an informed design of renewable energy policies and an accurate assessment of their effectiveness. We highlight how a state-of-the-art statistic used by governments to gauge such effectiveness, “virtual emission reductions”, is biased, because inter-industrial leakage effects are not captured.     

Prices vs quantities with multiple pollutants

We examine the choice of policy instruments (price, quantity or a mix of the two) when two pollutants are regulated and firms' abatement costs are private information. Whether abatement efforts are complements or substitutes is key determining the choice of policies. When pollutants are complements, a mixed policy instrument with a tax on one pollutant and a quota on another is sometimes preferable even if the pollutants are identical in terms of benefits and costs of abatement. Yet, if they are substitutes, the mixed policy is dominated by taxes or quotas.     

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.     

Emissions standards and ambient environmental quality standards with stochastic environmental services

Many important environmental policies involve some combination of emission controls and ambient environmental quality standards, for instance SO₂ emissions are capped under Title IV of the U.S. Clean Air Act Amendments while ambient SO₂ concentrations are limited under National Ambient Air Quality Standards (NAAQS). This paper examines the relative performance of emissions standards and ambient standards when the natural environment provides stochastic environmental services for assimilating pollution. For receiving media characterized by greater dispersion in the distribution of environmental services, the optimal emissions policy becomes more stringent, whereas the optimal ambient policy generally becomes more lax. In terms of economic performance, emissions policies are superior to ambient policies for relatively non-toxic pollutants, whereas ambient standards welfare dominate emissions standards for sufficiently toxic pollutants. In the case of combined policies that jointly implement emissions standards and ambient standards, we show that the optimal level of each standard relaxes relative to its counterpart in a unilateral policy, allowing for greater emissions levels and higher pollution concentrations in the environmental medium.