Download Chapter 13: Pollution Control Policy

Chapter 13:
Pollution Control Policy
“If we intend to provide a better life, and a better world, for future generations,
we can't ignore the quality of the environment we leave them.”
John Kasich, Governor of Ohio and former Congressman
“If the federal government had been around when the Creator was putting His hand to this state,
Indiana wouldn't be here. It'd still be waiting for an environmental impact statement.”
Ronald Reagan, former President of the U.S.
Economic Views of
Nature and Pollution
Natural Resources as Part of the
Economic Flow
 Adding natural resource inputs and pollution to a typical flow chart of an
economy identifies key links between nature and the production and
consumption of goods and services.
Your Turn 13-1:
 Sustainable development is perhaps the most fundamental environmental goal.
Discuss possible improvements in the production of housing and automobiles that
might aid in achieving this goal. Also identify where such improvements would
influence the resource and economic flow in Figure 13-1.
Pollution as an externality
 Pollution of the air or other common spaces creates several types of external
costs, including human health effects, reduced visibility and unnatural odors,
reduced agricultural and industrial productivity, and harms to plants and animals.
 Your Turn 13-2: From Figure 13-2, identify
the letters corresponding to the consumer
surplus, producer surplus, external surplus
(which is negative), and deadweight loss
for a private equilibrium
Resources and pollution as
public goods
 The primary public goods issue related to resources and pollution involves unowned property, often referred to as the commons or an open access resource.
 For example, ocean waters may be dumping grounds for trash or sewage,
common or public land may be subjected to overgrazing, and unregulated fishing
or hunting can lead to severe population declines or extinction (Hardin).
Valuing Natural and
Recreational Resources
The Travel Cost Method
 One begins a travel cost study by measuring an average individual’s cost in both
time and dollars of traveling to a given type of site, and then averaging this cost
across the number of days spent in the activity.
 Multiplying this measure of travel cost dollars per day by the total number of
visitors to the site then provides a measure of the annual value of a particular
recreation site.
 . Also, travel time studies of common recreational activities produced values 20 to
25 percent higher than those found in contingent valuation surveys or experiments.
The Hedonic Property Value Method
 This method uses multiple regression analysis to estimate the effect of various
types of pollution, nearby parks, or other externalities on property values.
 After controlling for other factors that affect property value, the estimated change in
property value due to the externality can be used as a measure of the externality’s
cost or benefit.
Existence Value
 Existence value refers to the value of a resource to individuals who are not
actively consuming or experiencing that resource. Existence value may arise for
several reasons.
 First, mass media brings these locations to distant households through film,
television, or the internet.
 Secondly, if a resource is preserved one has the option of visiting the site in the
future, an option which is lost if the resource is destroyed.
 Existence value may also arise from the altruism of knowing that others in the
present or future can enjoy the resource.
 Finally, a particular resource may have value in an ethical sense.
The Exxon Valdez Oil Spill
 Hausman et al (1995) utilized a travel cost study to estimate the spill’s effect on the
recreational use of the Prince William Sound area, and arrived at a damage
estimate of $3.8 million.
 Carson et al (2003) used surveys to measure the public’s willingness to pay to
avoid a spill like the Exxon Valdez event. Their final damage estimate was $4.9
billion, over 1,000 times larger than the travel cost estimate of Hausman.
 The extreme difference in these travel cost and survey results illustrates the
significance of non-use or existence value for a well-known environmental incident.
The Benefits of Controlling Air Pollution
Environmental Risk Assessment
 Environmental risk assessment involves the following steps:
1. Identifying the possible harm. This is known as hazard identification.
2. Estimating the relationship between harm and the amount of exposure. This is
known as dose-response assessment.
3. Measuring aggregate human exposure.
4. Integrating theory and evidence to determine the aggregate risk.
Hazard Identification
There are two primary types of non-laboratory studies of pollution harms.
 Epidemiological studies test the general population for pollution related health
effects while controlling for other health factors.
 Case cluster analysis involves identifying areas with unusually frequent health
problems that may be related to pollution exposure.
Dose-Response Analysis
 Relationships between the dose of a pollutant and its effect must be
estimated, but sometimes must be assumed.
Human Exposure
 Pollution monitors for air pollution are relatively common.
 Your Turn 13-3: Visit the EPA’s Envirofacts website, http://www.epa.gov/enviro/
click on a topic such as water or air, enter a town, city, or zip code, and see which
firms emit pollutants in that area.
 Census data on population by area is used to estimate the number of humans
affected in a given area.
Benefit-Cost Analysis of
Pollution Reduction
“Each agency shall assess both the costs and the benefits of the
intended regulation and, recognizing that some costs and benefits are
difficult to quantify, propose or adopt a regulation only upon a
reasoned determination that the benefits of the intended regulation
justify its costs.” (Executive Order 12866, section 1:b:6) issued by
President Clinton in 1993.
Dollar Values of Human Harms
For simplicity we will limit our list to four factors affected by air pollution:

(1) improved human health,

(2) improved visibility,

(3) improved agricultural production, and

(4) reduced erosion of buildings.
 Improved human health can be valued using at least two measures, Quality Adjusted
Life Years (Chapter 10) an expected value of life estimate. The expected value of life
involves multiplying a common figure for the value of life by the change in the number
of deaths due to the policy.
Measuring Abatement Costs
Pollution control cost estimates generally use one or both of two methods
 The first is the engineering method. In this approach a few alternative pollution
control designs based on current technology. The capital and operating costs of
each design are then estimated. The total cost of design is then estimated by
multiplying the cost per pollution source of each alternative by the total number of
sources.
 The survey method for assessing pollution control costs begins by asking private
and public sector polluters about their pollution spending under the previous policy,
their expected spending under any new policy proposal, and their preferences
among alternative pollution control options.
Policy Goals: How Much and
Where to Reduce Pollution
How Much to Clean Up?
 The economically efficient level of pollution abatement occurs where the marginal
benefits and marginal costs of pollution clean-up are equal, as in Figure 13-4.
Uncertainty and Clean-Up
 Uncertainty allows a wide range of possibly optimal clean-up levels, and a
range of political and policy views about the clean up level.
Where to Clean Up?
 Achieving efficient cleanup requires that each firm clean up to its efficient level.
 In Figure 13-6, 2 firms face significantly different costs of pollution abatement. If
both are required to clean up to the average level, both firms will have inefficient
results. Firm 1 is forced to clean up beyond the point where its marginal benefits
equal marginal costs, and firm 2 has not yet reached its efficient level of clean-up.
 For pollutants that cause significant local exposure, unequal levels of clean-up
lead to unequal levels of harm as well, a strong ethical argument for equal cleanup.
Methods of Pollution Control
Direct Regulation and Incentives
 Two general types of pollution control policies are direct regulation and
incentives or, more combatively, command and control policies and pay to
pollute schemes.
 Direct regulation involves setting pollution control standards administratively and
enforcing them using fines through regulatory agencies and the courts.
 Incentive approaches work by creating a direct financial incentive for the private
sector to reduce its emissions. The primary incentive methods are pollution taxes,
pollution permits, and abatement subsidies.
Types of Direct Regulation
 Ambient standards (ambient means surrounding on all sides) include
metropolitan, regional or national maximums on certain pollutants. The U.S.
government has established ambient standards for 6 “criteria pollutants”;
particulate matter, sulphur dioxide, carbon monoxide, nitrogen dioxide, lead, and
ozone.
 Effluent limits are maximum standards for individual pollution sources such as
auto tailpipes, smokestacks, and sewer system outlets.
 A technological requirement requires particular anti-pollution actions or
equipment without necessarily measuring the level of emitted pollution.
 Banning substances or processes that produce pollution can be appropriate if the
substance is extremely harmful, cannot be effectively monitored, cannot be
adequately contained, and has reasonably cost-effective substitutes,
Incentive Approaches
 Emissions Taxes: If the marginal cost of reducing a unit of pollution is less than the
tax, the firm gains profits by cleaning up rather than paying the tax. In Figure 13-8
Firm 1 can maximize its profits, all else equal, by cleaning up to abatement level
A*Firm 1, while Firm 2 has the incentive to reduce its pollution by a larger amount.
 Emissions taxes concentrate the clean-up
among firms with low clean-up costs since more
Expensive firms are likely to pay the tax.
Cap and Trade:
Marketable Pollution Permits
 Under a permit system government issues a limited number of permits to pollute.
Only those who own permits can pollute, and the maximum number of permits
issued by the government sets a maximum allowable level of pollution somewhat
like an ambient standard.
 Under a permit system government issues a limited number of permits to pollute.
Only those who own permits can pollute, and the maximum number of permits
issued by the government sets a maximum allowable level of pollution somewhat
like an ambient standard.
 A firm’s demand for pollution permits depends on its pollution abatement costs,
which represent the opportunity cost of purchasing the permits. Firms with higher
clean-up costs are willing to bid more for permits, leaving lower cost firms to
reduce much of the pollution.
Permits vs. Equal Clean-up for All Firms
 Example: Assume there are 3 polluting firms in a market and that pollution is
currently free to the polluter. Assume that each firm faces the constant
per-unit abatement cost shown in Table 13-3.
 Columns (1) and (2) present the outcomes of a policy requiring a uniform ½
reduction in the original pollution level from 500 to 250 tons.
 Columns (3) and (4) represent the outcomes of a permit system with a
maximum of 250 tons of pollution.
Table 13-3: Equal Abatement vs. Permits
FIRM
POLLUTION
ABATEMENT
COST/UNIT
(1) POLLUTION
AFTER
UNIFORM ½
REDUCTION
(2) TOTAL
COST
OF ½
REDUCTION*
(3) PERMITS
PURCHASED
(4)
ABATEMENT
COST
Firm 1
100 tons
$20/ton
50
$1,000
100
0
Firm 2
300 tons
$16/ton
150
$2,400
150
$2,400
Firm 3
100 tons
$10/ton
50
$500
0
$1,000
Total
500 tons
Xx
250
$3,900
250
$3,400
Case Studies
Climate Change, Acid Rain, and Ozone Depletion
Climate Change
 According to most analysts, much of the warming over the past half-century has
been caused by the emission of greenhouse gases including methane, nitrous
oxide, and particularly carbon dioxide (CO2), all of which are increasing.
Analyzing the Cost of Greenhouse Gases
 The economic analysis of climate change relies on the use of integrated
assessment models, which combine climate science models and economic
models that predict effects of climate change on output, consumption, and other
variables.
 The basic measurement goal of these models is estimating what is known as the
social cost of carbon (SCC). This is the marginal or average cost of emitting a
ton of carbon into the atmosphere.
 Greenstone, et.al. (2011) reported social cost of carbon estimates ranging from $5
per ton to $35 per ton.
 In 2013 the official social cost of carbon estimate for the U.S. EPA was raised from
$21 to $37 based on new evidence regarding sea level rise.
Effects of Climate Change
 The 1.3 degree increase in the Earth’s average temperature has already led to
decreasing arctic sea ice, smaller snow cover area, increasing permafrost
temperatures, a rise in sea level of about 8 inches since 1870, a 25% increase in
ocean acidity, shrinking glaciers, changing precipitation patterns, shifts in animal
ranges and migration patterns, net negative effects on crop yields and increases in
heat waves, droughts, floods, cyclones, and wildfires.

http://www.epa.gov/climatechange/science/overview.html
Policy Options
 There are three main strategies for climate change policy; climate engineering,
adaptation, and greenhouse gas mitigation.
 Climate engineering entails methods such as directly removing CO2 from the air
or using airborne particles to reflect some sunlight back into space.
 Adaptation involves modifying human behavior to reduce the harmful effects of
climate change.
 The most commonly studied policy option is mitigation, the reduction of
greenhouse gas emissions at the source.
Mitigation Policies for Climate Change
 Greenhouse gas mitigation policy tends to emphasize incentive methods such as
carbon taxes and permit markets. One reason for this emphasis is that the effects
of greenhouse gases are truly global, so that local differences in exposure are not
important.
 The largest cap-and-trade system in existence is the European Union Emissions
Trading Scheme (EU ETS). The EU ETS started in 2005 and covers CO2
emissions from power and heat generation, energy intensive sectors like oil
refineries, metals production, cement, ceramics, pulp and paper, and the aviation
industry.
 The largest economy to adopt a general carbon tax is Japan, which did so in
October 2012. It taxes CO2 emissions from all fossil fuels including petroleum, gas
and coal.
 While no comprehensive climate change policy has been adopted in the U.S.,
some more limited actions have been taken.
Acid Rain
 Acid rain is caused by reactions between water vapor and either sulphur dioxide
(SO2) or nitrogen dioxide (NO2). These reactions create sulfuric and nitric acids
which then fall as rain.
 The primary sources of acid rain are coal-burning electric generators, although
autos and smelters also produce these gases.
 Acid rain harms aquatic life in lakes and streams, damages trees, and also
damages buildings.
Acid Rain Policy Options
 In addition to regulations, acid rain is also controlled in the U.S. by the first national pollution
permit program passed in 1990. The goal of the permit program was to reduce SO2
emissions to ½ of their 1980 level by 1995.
 A drop in the cost of low-sulfur coal, along with investment in scrubbers that remove SO2
from smoke, created an initial disequilibrium in the permit market and less emissions than the
maximum allowable level (Schmalensee, et. al., p. 58).
 Due to more recent economic growth, the price of permits has more than doubled since the
early years, but the reduction in acid rain has been substantial, as can be seen in Table 13-5
Table 13-5: Change in Sulfur Pollution in the U.S.
Average,
Average,
Region
1989-1991
2007-2009
Mid16
8
Atlantic
Total Sulfur
Midwest
15
7
Deposition (kgS/ha)
Northeast
9.8
4.7
Southeast
8
4.6
Source: http://www.epa.gov/airmarkets/progress/ARP09_3.html
Percent
Change
-50
-53
-52
-43
Ozone Depletion
 The earth’s stratosphere contains an ozone layer that protects the earth from solar
radiation. This radiation can result in skin cancer and crop damage, among other
problems.
 Ozone depletion during the 20th century produced holes in the ozone layer,
particularly over the Southern polar region and to a lesser degree over the Arctic.
 The primary human cause of ozone depletion is a chemical reaction involving
chlorofluorocarbons (CFCs), a relatively complex set of compounds used for much
of the 20th century as refrigerants, aerosol propellants, and for other uses.
Ozone Depletion Policy
 Discoveries about the causes and effects of CFCs let to the passage of the 1987
United Nations Montreal Protocol proposing a 50 percent reduction in CFCs by
2000.
 In response to new evidence, later agreements required the banning of CFCs by
1996.
 U.S. policy during the transition period included research efforts to find substitutes
for CFCs, a mandatory recycling program, an escalating tax on ozone-depleting
substances, and a CFC emission permit program in which the cap on permissible
CFCs eventually declined to zero.
 Recent evidence suggests that the decline in stratospheric ozone is slowing, and
that the ozone layer should begin to increase within the next decade and return to a
normal level by 2050 (http://www.epa.gov/Ozone/science/sc_fact.html).
Conclusion
 This chapter has provided a review the process of environmental policy analysis
with some emphasis on the role of scientific study in determining the benefits of
pollution control.
 Alternative goals of pollution policy were discussed, along with a review of both
regulations and incentive approaches to pollution control.
 Policy examples in this chapter included climate change, acid rain, and ozone
depletion.
 With the significant exception of climate change, policy has been successful in
reversing the worsening effects of these particular pollution problems.