Environmental Economics: Economics of pollution control

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what are the economics of pollution control?

1. production/pollution provides benefits as well as costs.
2. optimal pollution level occurs where difference between benefits and costs is greatest.
3. lack of environmental property rights is fundamental reason for too much pollution.
4. cost effective pollution regulations equalize many costs of pollution abatement across pollution sources.

key questions of pollution control are?

1. how much pollution should be allowed or is optimal (creating target)?
2. how should the optimal level be achieved (how to hit target)? cost efficiency = with as little waste as possible.

what is the benefit of pollution?

reduced or no abatement costs. i.e. money saved by not having to abate an additional unit of pollution.

what is the optimal level of pollution?

when marginal benefit = marginal cost. at a higher level you've produced too much pollution and at a lower level, you've not collected all benefits (could abate less?)

define coase's theorem in relation to pollution control

parties affected by externality can costlessly negotiate an efficient outcome.

why is government regulation needed to achieve optimum in the case of coase?

b/c govt is needed to provide information, contracts and enforcement of property rights. i.e. lower transaction costs such as legal/admin costs, property transfers; bringing disputing parties together.

what is the efficient level of pollution?

environmental objective is set at point that balances marginal abatement benefits with marginal abatement costs.

what is cost effective/efficient policy?

when environmental objective is met at lowest possible cost, using least economic resources.

what is a command and control policy?

when pollution limits or tech based requirements are used to directly control the quantity of pollutants released. Anything mandated.

what is a market based approach?

when incentive-based instruments are used to motivate pollution abatement based on natural market forces. Price oriented or anything that alters relative prices.

what are some of the criteria for choosing pollution control instruments?

1. cost effectiveness-attain target at least cost?
2. dynamic efficiency-does it create incentives for improving products or processes in less polluting ways. emissions charges and permits create incentives while command and control do not.

what is a "double dividend"?

when a revenue-neutral environmental instrument generates 2 possible benefits or dividends. e.g. generating revenue and correcting the externality.

what does a steep marginal curve imply?

that an additional unit of pollution costs more to society so you would want to regulate the quantity of the pollutant emitted.

what is the equimarginal principle?

the sume of abatement costs across all firms are minimized when marginal abatement costs are equalized across polluting firms.

what is the uniform standard?

each firm is required to abate the same amount of pollution and not the most cost effective.

what are the regulator instrument choices that would induce firms to negotiate mutually beneficial costs?

1. differentiated command & control regulations that differ for each firm. this is very difficult because the regulator would have to know how much it costs for each firm to abate).
2. emissions trading (cap & trade)
3. emissions charges (taxes)

what are the pros of a carbon tax (as debated)?

-has an incentive to enforce b/c it is revenue-generating
-sends "loud" price signal for pollution and thus incentivizes to reduce emmissions.
-the same price for carbon instead of fluctuating prices.
-easy to administer and monitor because involves 2-party transactions (firm and IRS).
-economically efficient???

what are the cons of a carbon tax (as debated)?

-difficult to harmonize especially internationally because there can be no consensus on tax rate.
-deadweight loss created?
-it is difficult to find the right price to achieve reduction goal.

what are the pros of a cap and trade system?

-creates global carbon market with mechanisms and flexibility to achieve targets at lowest cost.
-politically feasible especially if permits are given away rather than auctioned.
-simply speaking "isn't a tax"
-auctioned permits are also revenue generating
-cap ensures certainty in amount of reduction achieved.
-puts a direct limit on qty of emissions while letting the market determine price thus the environmental objective is met while politically feasible.

what are the cons of a cap and trade system?

-undemocratic and unlikely to happen especially in developing countries who don't have the infrastructure and especially since developed countries don't easily part with "cash" or aid.
-enforcement is difficult. countries could take the cash from sold permits and not enforce reductions.
-unable to track prices and compare to true external harm.
-multi-party relationship needed for complex transactions.

what was the stern review?

UK govt report that caused a furor because it argued contrary to conventional wisdom, that there is an economic case for prompt and powerful measures to mitigate changes in climate.
led to extensive debate around the choice of discount rate (low, overvalues the future); the weight one places on equity; and the measurement of the costs of climate change (too high?).

what was nordhaus' critique of stern?

-wondered if carbon emissions and temperatures would rise as quickly as the report suggests
-main objection was the choice of discount rate which he argued was too low and that we don't behave with such a rate.
-concluded that stern's results stem almost entirely from ethical judgments.

why is the discount rate so critical?

-Most economists feel strongly that the pure rate of time preference should be 0 in the case of climate change
-Consumption RTP really difficult
-There are many different types of goods whose consumption trends are different, thus many different consumption RTPs, which will depend on how fast values of various different goods fall with respect to their own consumption levels and with respect to those of other goods

what does weitzman argue?

-Discount rates do not matter as much as uncertainty, and climate change is inherently about uncertainty. We do not know much about the distribution itself and are likely to ignore low-probability high-impact events.
-Probability distributions with "fat tails"
-so says this is why we should act now, not because of a moral obligation to set interest rates to zero (as Stern suggests).

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