Regulatory Options Efficiency Goal Generate regulatory tools to fix environmental problems Why regulate Does free market efficiently provide goods and services Market failure externalities public goods etc Market power monopolies inefficiently restrict production to raise prices Information problems damages uncertain food safety env quality Types of questions in regulation 1 2 3 What is the optimal amount of pollution To reduce by X who should reduce and by how much What regulatory instrument s should be used to achieve that level Problem EPA has regulations to control biological oxygen demand BOD EPA would like your advice on how to improve water quality lower BOD without increasing costs What is your advice BOD Removal Costs of US Regulations Industry Subcategory Marginal Cost Poultry Duck small plants 3 15 Meat Packing Simple Slaughterhouse 2 19 Cane Sugar Crystalline Refining 1 40 Leather tanning Hair previously removed 1 40 Paper Unbleached Kraft 0 86 Poultry Chicken small plants 0 25 Raw Sugar Processing Louisiana 0 21 Paper NSSC Sodium Process 0 12 Poultry Chicken large plants 0 10 Principle of efficiency Most common approach uniform burden eg everyone cuts pollution by x Two possible results Too much pollution for the total amount of pollution control costs Too much cost for a fixed level of pollution reduction Burden of pollution control should fall most heavily on firms with low costs of pollution control More Generally The efficient amount of pollution unit Marginal Control Cost Total Damage Cost Marginal Damage Cost Total Control Cost Q Units of pollution Recall example from 1st week 60 firms each pollute 100 tons 30 low abatement cost 100 ton 30 high abatement cost 1000 ton Everyone reduces 1 ton Cost 33 000 Total reduction 60 tons For same cost how many tons could we have reduced With mixed high and low cost firms abating we could Either Reduce more pollution for the same amount of money or Reduce the same amount of pollution for less money So we always want low cost firm to shoulder abatement If costs aren t constant two firms eg NOx emissions Abatement Cost unit MCA Who should abate the 1st unit of NOx MCB NOx Reduction How much abatement from each A Loss from equal reduction MCA B MCB A 0 B 80 25 55 40 40 80 0 How did he do that 1 2 3 4 5 6 Determine how much total abatement you want e g 80 Draw axis from 0 to 80 A 80 to 0 B Sum of abatements always equals 80 Draw MCA as usual flip MCB Lines cross at equilibrium Price is MC for A and for B The equimarginal principle Not an accident that the marginal abatement costs are equal at the most efficient point Equimarginal Principle Efficiency for a homogeneous pollutant requires equating the marginal costs of control across all sources Control costs Should include all other costs of control monitoring enforcement administrative Equipment Regulatory uncertainty increases costs If you are a polluter what would be your response to uncertainty in what you have to do Does this increase your costs Would like to design regulations that provide an incentive to innovate Common Instruments for regulation Command and Control Centralized determination of which firms reduce by how much Taxes charge X per unit emitted This increases the cost of production Forces firms to internalize externality Quotas standards uniform standard all firms can emit Y or non uniform Tradable permits All firms get Y permits to pollute can buy sell on market Other initial dist n mechanisms Weitzman on carbon taxes One can only wish that US political leaders might have the insight to understand and the courage to act upon the breathtakinglysimple market friendly idea that the right carbon tax could do way more to unleash the power of decentralized American inventive genius on the problem of developing economically feasible noncarbon intensive alternative technologies than all of the command and control schemes and patchwork subsidies making the rounds in Washington these days Example 1 Taxes in China China extremely high air pollution causes significant health damage Instituted wide ranging system of environmental taxation 2 tiers World Bank report estimates that MC of abatement MB of abatement A creative quota bubble policy Multiple emissions sources in different locations Contained in an imaginary bubble Regulation only governs amount that leaves the bubble May apply to emissions points within same plant or emissions points in plants owned by other firms Example 2 Bubble policy in RI Narraganset Electric Company 2 generation facilities in Providence RI Required to use 2 2 sulfur in oil Under bubble policy Used higher sulfur in one plant burned natural gas at other plant Savings 3 million year Example 3 SO2 Allowances 1990 CAAA sought to reduce SO2 emissions from 20 million tons yr to 10 million tons yr Set up market in emission allowances 97 of 10 million tons allocated to polluters Rest auctioned at CBOT anyone can buy see http www epa gov airmarkets forms SO2 Allowance Prices 1994 2004 Source http www epa gov airmarkets trading so2market alprices html How big the tax or how many permits We know Optimal level of pollution is Q Marginal Social Cost at the optimum is P Marginal Private Cost at optimum is Pp Optimal tax exactly internalizes externality t P Pp Effectively raises MC of production Basic Setup Env Costs Private Costs Social Costs unit MSC MPC P MEC Pp D Q Qc Dirty Good unit MPC with tax MSC t P MPC no tax Pp D Q Qc Q pollution Problem How to reduce VOC emissions in LA without increasing costs Where do VOC s come from Painting cleaning in manufac cars Current regime command and control NSPS Control Technology Guidelines new source performance standards SIP s firm by firm rules state implementation plan Example automobiles Technology requirements Emission limits per mile How could this be done differently Alternatives 1 emmission fees 1 lb of VOC 2 marketable permit issue permits for 500 tons Get equimarginal principal in either case Why Problem Too many houses being built in SB want to slow growth How Current regime command and control tools Zoning Lengthy permit requirements Goldplated regulations add l requirements code Infrastructure fees Limit critical inputs e g water Alternative approaches Fees Increased property tax Building permits 1000 square foot Land conversion fee Marketable permits Issue 100 permits per year or 200 000 sq ft Auction permits Give away permits what is effect What are differences with between fees and marketable