Environmental Economics

Of Cows and Cars

Peter Berck

Cows

Calif is tops!

Production

• Dairy – Inputs that are paid for

• Feed• Water• Labor• Land

– Inputs not paid for• Removal of ammonia compounds by air• Removal of nitrogen and phosphorus to water

Suppose they paid for pollution

Quantity of Milk

price

DS’

S

Response to a pollution charge

• Could trap manure in a pond, digest it, and burn the methane in an engine.– Buys capital goods (engine, pond)– Sells electricity (but it won’t pay for engine, pond)– Doesn’t pollute as much

• Suppose that farmer had to pay for release of methane, etc. Would that tip the balance to cleaner production?

• As price paid for right to pollute goes up, amount of pollution per unit output goes down. Amount of other inputs goes up.

Two effects of pollution charge

• Pollution per unit of output goes down (she buys the generator and pond)

• Quantity of polluting output goes down (her supply curve shifts in and less polluting output is produced in equilibrium)

Question

• (Hypothetical) A tax of $100/ton of organic gasses emitted would induce the farmer to use the generator and decrease his emissions by 75%.

• Would the farmer rather be ordered to use the generator or would she rather face the tax?

Question:

• If farmers have to clean up (this is real see the draft scoping plan for GHG!)– It will cost them more to make milk

• Will the price of milk go up?

• Can consumers avoid paying for cleanup?

• Who does the general public think pays?

Sacred Cars:

Efficient Cleanup

0 2.7 6.7 15 22.10

0.2

0.430.45

0.6

0.8

0.93

1.2

1.4

1.6

1.8

Abated by Powerplants (million tons)

$ pe

r lb

.

MCA Powerplants

Initial Abatement Allocation

MCA Cars

22.1 19.4 15.4 7.1 0

Abated by Cars (million tons)

MCA is marginal cost of abatement—cost to clean up the next unit of pollution

The Case for Tradable Permits

It costs powerplants much more than it costs cars to clean up 1 ton of Nox. At original allocation

We need to remove 21 mt from the air.

Which is better:

1. Cars and powerplantsmust abate as in original

2. Powerplants pays cars money and cars clean up another 4mt.

What could be Wrong

• power pays cars and cars lie about cleaning up.

• power is in an unpopulated place and cars are in the center of a city

• Pollution is just wrong and power shouldn’t be allowed to pollute (but it isn’t wrong for my car to pollute, just yours…)

Politics

• California may not clean its air by prohibiting 2-stroke lawn mower engines.

• California must add alcohol to its gasoline, even though we don’t believe that is the best way to clean the air.

• California won the right to regulate heavy trucks in its State Implementation Plan.

Model

• Politicians need votes– Can have popular position– Can get $ and use them to advertise