Topics in Evironmental Economics Carbon Taxes and the Economics of Pollution.314190500

8/3/2019 Topics in Evironmental Economics Carbon Taxes and the Economics of Pollution.314190500

1/32

Topics in Environmental Economics:Taxes, Emissions Trading, and OtherTopics in the Economics of Pollution

Guest Lecturer: Hans Zigmund

DePaul University

PPS 329/359 Special Topics:Applied Urban and EnvironmentalEconomics


2/32

Purpose

To provide students with the tools of economic

theory for analyzing environmental issuesfrom an economic perspective.

To that end this lecture will be largelytheoretical with relevant applications in thesecond half of the talk.


3/32

Outline Macroeconomics (Growth Theory)

Microeconomics Theory Utopian Capitalist View

Cost Benefit Analysis

Adjustments at the Margin (Taxes, Subsidies, andMarkets)

Microeconomics applied to policy Kyoto Protocol

European Union Emission Trading Scheme (ETS)

Alternative International Agreements

Boulder Carbon Tax


4/32

Economic Growth

Increase GDP/Capita (Economic Output)

Factors of production:Land (L)

Labor (N)

Capital (K)

Economic output requires the exploitation ofnatural resources.


5/32

Areas of Government Intervention

Reduce Pollution (Todays area of focus)

Reduce Depletion of Natural ResourcesManage Public Lands

Compensation from Natural Disasters


6/32

Environmental Perspective onGDPFocus of economic growth is on increasing

GDP/capita.Hides negative impact on ecosphere of

producing goods and services.

Pollution related healthcare costs

Exxon Valdez clean up $2.2bn


7/32

Environmental Perspective onGDPGDP does not account for the degradation of

natural resources.Erosion

Water Pollution

Exhausting Mineral Resources

Depleting Fisheries (until possibly too late)


8/32

Environmental Perspective onGDPHides negative or underestimates some

positive effects.Energy efficient light bulbs and appliances.

Fuel efficient cars.


9/32

Index of Sustainable Economic Welfare

(ISEW) and Genuine Progress Indictor(GPI)

Created by Herman E Daly and John Cobb Jr.(1989) and Philip Lawn (2003)

Adjusts GDP/capita for

Income Distribution

Depletion of natural resources

Loss of wetlands Loss of farmland from soil erosion and urbanization.

Cost of air and water pollution

Estimate of long term cost of global warming.


10/32

Utopian Capitalist View: ParetoOptimalityEdgeworth Box

Exhausting Gains On TradeConditions of Pareto Optimality

You cannot make one party better off withoutmaking another worse off.

Parties involved in exchange bear the full true costof the transaction.(no externalities)


11/32

Cost Benefit Analysis: PollutionAbatementSeek out the point that minimizes both the

cost of abatement and environmental damagecosts (or maximize environmental benefit).

Total Cost curve is minimized at the point ofintersection.

$1 in abatement cost = $1 in damage costcontrol or environmental benefit.


12/32

Cost Benefit Analysis: Pollution Abatement

0Societysm

arginalbenefit

andmarginal

cost

ofpollutionaba

tement

Amount of pollution abatement

Socially optimum

amount of

pollution

abatement

Damage Cost

Abatement Cost

(Environmental

Benefit)

TC


13/32

Cost Benefit Analysis: PollutionAbatementOn the right side, spend too little leads to high

environmental costs.On the left side, spend too much and it trade

offs will have to be made with other socialprograms such as public health.


14/32

Regulatory ApproachHistorically the regulatory approach has been

effective.Example:

Automobile emissions and MPG standards.

Leads to reductions in Carbon Monoxideemissions and other pollutants.

Is the regulatory approach the most efficient?


15/32

Regulatory ApproachTwo Firm Model

Marginal Cost/Marginal Benefit andinefficiencies.

Because hypothetical firm A and firm B toabate the same quantity under different

marginal cost structures, firm A may abate inexcess of marginal benefit while firm B mayabate less than optimal.


16/32

Regulatory Approach

0

Marginal

costof

pollutionabate

ment

Amount of pollution abatement

QR

I

II

Damage Per Unit

QeA QeB

MCA

MCB


17/32

Regulatory ApproachArea I represents abatement cost in excess of

benefits for firm A.Area II represents opportunity cost loss of firm

B for stopping abatement while marginalbenefits were still greater than marginal costs.


18/32

Adjustments at the Margin:Pollution Taxes In efficient markets P = MC.

True only when firms marginal cost equals the realcost of the next unit of production.

If pollution create costs on society not incurred bybusiness (externality), then an over allocation of

resources into production will occur. Taxes can correct for this over allocation by

internalizing the externality.


19/32

Adjustments at the Margin:Pollution TaxesSpillover

costs

Overallocation

Corrected

P

Q0 QeQ0

MCt

MC

DTAX

Pe

P0


20/32

Adjustments at the Margin:SubsidiesR&D that leads to reduction in pollution has

positive societal benefits.

R&D will only be invested in if profitable.

Subsidizing R&D can reduce the time it takesto develop new technology.

R&D doesnt always generate a outcome onthe income statement. The subsidy helpsoffset the risk of investment.


21/32

Adjustments at the Margin:SubsidiesP

Q

R&D

Subsidy to

producers

Decreases

marginal

cost

Underallocation

Corrected

Q0Qe0

MCs

MC

D

Pe

P0


22/32

Adjustments at the Margin: Marketsfor Pollution Rights Politically more palatable to business because it relies on

markets rather than taxes for corrections.

Firms (such as public utilities in the market for SO2 )

receive a fixed number of pollution allowances.

These credits can be sold and bought on the CBOT.

If firms use more pollution than they own credits for theypay a fine.


23/32

Adjustments at the Margin: Marketsfor Pollution Rights

Price

perton

ofpollution

right

Quantity of SO2 pollution rights (millions of tons)8 9 10 11 12 13

$2000

$1000

D2007

2010

S= Supply

ofSO2

pollutionrights


24/32

Allowance Trading Basics An emissions "cap":A limit on the total amount of

pollution that can be emitted (released) from all

regulated sources (e.g., power plants); the cap is setlower than historical emissions in order to reduceemissions.

Allowances:An authorization to emit a fixed amountof a pollutant.

Measurement:Accurate tracking of all emissions.Source:http://www.epa.gov/airmarkets/trading/basics.html


25/32

Allowance Trading Basics Flexibility: Sources can choose how to reduce

emissions, including whether to buy additional

allowances from other sources that reduceemissions.

Allowance trading: Sources can buy or sellallowances on the open market. Because the total

number of allowances is limited by the cap, emissionreductions are assured.

Compliance:At the end of each compliance period,each source must own at least as many allowances

as its emissions.Source:http://www.epa.gov/airmarkets/trading/basics.html


26/32

Trading the Right to PolluteThe NOx Budget Trading Program is a market-

based cap and trade program created toreduce emissions of nitrogen oxides (NOx)from power plants and other large combustionsources in the eastern United States.

Source : http://www.epa.gov/airmarkets/progsregs/nox/sip.html


27/32

Trading the Right to Pollute Market-based sulfur dioxide (SO2) allowance trading

component of the Acid Rain Program

Utilities regulated under the program, decide themost cost-effective way to use available resources tocomply with the acid rain requirements of the Clean

Air Act.

Purchase pollution allowances. Switching to lower sulfur fuel.

Reduce emissions by employing energy conservationmeasures

Source: http://www.epa.gov/airmarkets/trading/factsheet.html


28/32

Success of Acid Rain Program whichincludes trading pollution allowances Reduced SO2 emissions by over 5.5 million tons from 1990

levels, or about 35 percent of total emissions from the powersector. Compared to 1980 levels, SO2 emissions from power

plants have dropped by more than 7 million tons, or about 41percent.

Cut NOx emissions by about 3 million tons from 1990 levels, sothat emissions in 2005 were less than half the level anticipatedwithout the program. Other efforts, such as the NOx Budget

Trading Program in the eastern United States, also contributedsignificantly to this reduction.

Led to significant cuts in acid deposition, including reductions insulfate deposition of about 36 percent in some regions of theUnited States and improvements in environmental indicators,

such as fewer acidic lakes.Source: http://www.epa.gov/airmarkets/progress/arp05.html


29/32

Kyoto Protocol Industrialized nations reduce CO2 5 percent from 1990

levels by 2008-2012 compliance period.

United States withdrew in 2001. China and India are not required to comply because they

are developing nations.

By 2002 Kyoto only covered about 30 percent of global

CO2 emissions. Too little too fast.

Not enough change to make a difference.

Difficult to comply with for countries who experienced

substantial growth in the 1990s.


30/32

European Union EmissionsTrading Scheme (ETS)

Kyoto with teeth.

Covers half of Europes carbon emissions. (8% of global)

Each country creates a national allocation plan forspecifying caps on greenhouse gases.

Businesses can either reduce their emissions or purchaseallowances from facilities with an excess of allowances.

Allowances traded in the ETS are not printed but are heldin electronic account registries set up by Member Statesand are overseen by a Central Administrator at the EU.

Emissions considered a service under EUs VAT.Sources: http://ec.europa.eu/environment/climat/emission.htm and Nordhaus, William D. The American Economic Review, After Kyoto:

Alternative Mechanisms to Control Global Warming 96(2) May 2006, 31-34


31/32

Alternative International Treaty Options Link treaty to specific environmental objectives rather than a

baseline year pollution level. (e.g. temperature, costs,damages) (Nordhaus 2006)

Use an extended time path. Depart gradually from a businessas usual pattern becoming more severe over time. (Olmsteadand Stavins 2006)

Extend tradable allowances globally. (Olmstead and Stavins

2006) Extend participation beyond industrialized nations to include

the developing world and United States. (Olmstead andStavins 2006)

Nordhaus, William D. The American Economic Review, After Kyoto: Alternative Mechanisms to Control Global Warming 96(2) May2006, 31-34 and

Olmstead, Sheila M. and Robert N. Stavins. The American Economic Review, An International Policy Architecture for the Post-Kyoto Era96(2) May 2006, 31-34 and


32/32

Boulder Carbon Tax Boulder's City Council adopted the goals of the Kyoto Protocol in

2002 to reduce greenhouse gas emissions below 1990 levels by2012.

On November 14, 2006 with Initiative 202, the Climate Action PlanTax, the Boulder Colorado city council approved a carbon tax whichis applied to residents electric and gas bills.

Average tax for homeowners $1.33/month and Business

$3.80/month Estimated energy cost savings from implementing the Climate

Action Plan are $63 million over the long term.

Revenue estimated is $6.7 million by 2012, when the goal is to havereduced carbon emissions by 350,000 metric tons.

Source:http://www.ci.boulder.co.us/index.php?option=com_content&task=view&id=6136&Itemid=169and http://www.env-econ.net/2006/11/a_carbon_tax_in.html

Documents

Topics in Evironmental Economics Carbon Taxes and the Economics of Pollution.314190500