Download Environmental Regulations in Developed and Developing

International
Dimensions of
Regulation
Developing countries need special attention
Global pollutants particularly tough to control
Green Accounting
Double Dividend
Motivation

Group Project: Treaty proposed to
free up trade between US and
Guatemala. What restrictions should
we put in place to avoid environmental
degradation in Guatemala?
Income effect
Why are oil refineries in poor areas?
 Why do poor countries have weak
environmental regulations?
 Can we expect environmental
regulations to weaken or tighten over
time in the US or any country?
 [Similar questions as when we
considered environmental justice.]

Amount of
Env. Qual.
Demanded
(at fixed
Price)
Luxury, Normal and Inferior
Goods
Luxury Good
(Elast > 1)
Normal Good
(Elast <1)
Inferior Good
Income
Larry Summers Memo
What was Summers suggesting?
 What are the arguments in support of
his position?
 What are the arguments against his
position?

GATT and the Environment


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GATT (General Agreement on Tariffs and Trade) says:
 You can place border restrictions on the quality of a product (ie, no
chunks of Flipper in the can of tuna)
 You cannot place restrictions on how the product was produced (you
cannot prohibit use of hormones in raising beef if no hormones can be
detected in the imported beef)
 Allows environmental restrictions (eg, protecting dolphins) if the
restriction allows country to choose methods that provide equal levels
of environmental protection – ie, not technology standards
What are the reasons for these rules?
Do they work in providing environmental protection?
Why did US lose the Venezuelan Refinery Case (Sanger article)?
Dynamics of Environmental
Protection
Price
Shifts with increases
in income.
Supply
Demand
Environmental Quality
Environmental Kuznet’s
Curve
Sulfur
Emissions
Early phases of economic
growth tend to increase pollution
As income rises, clean
environment is valued
more, emissions decline
But very difficult to estimate
due to lack of time series
Income
Reasons for failure of EKC
Corruption – bribe officials to locate
hazardous waste sites
 Nondemocratic regimes – preferences
of population not represented in
environmental regulations
 Poorly educated population
 Not all pollutants have same shape
EKC

Back to Group Project

What are some answers to our original
group project problem?



Do we need to put into place safeguards so
that Guatemala doesn’t become dumping
ground due to corrupt officials?
Should we worry about differences in regs
between US and Guatemala, at least in the
short-run?
Will increases in income in Guatemala tend
to increase env quality?
Transboundary Environmental
Problems

Who fixes environmental problems
that cross national borders?
Stratospheric ozone depletion
 Global Warming/climate change
 Global species destruction (sea
turtles)


Need IEA’s: International
Environmental Agreements
The Card Game Analogy



SETUP: Each player is given two cards: one red and one black
PLAY: Each player will anonymously hand in one card to Center
(i.e., to Prof.)
PAYOFF to each participant after play of game:





REWARD:


10 Environmental Currency Units (ECU) for a red card in your hand
1 ECU for each participant for each red card Center holds
Maximum payoff: (N-1)+5 [where N = # participants]
Ex: 51 players: the maximum payoff is 60
Anyone scoring over 35 gets a Kiss®!
YOUR TASK: figure out what to hand in to the Center
Choose Your Strategy

Hand in your red card?




It yields less to you than if you keep it
It yields far more to the group than if you keep it.
Society wants you to hand in your red card
Keep your red card?


It is worth far more to you in your hand
Your payoff will be higher; society’s lower
Results

This experiment has been run many times



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When repeated with the same group, cooperation (handing in the
red card) tends to decline
Analogous to transboundary environmental problems


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
typically ⅓ -- ⅔ of people hand in their red card
Refer to Scott Barrett (2003)
Fundamental conflct between individual and group interests
Self-interest diverges from group interest
Powerful incentives to shirk your responsibility
Understanding how to solve card problem gives insight into solving
transboundary environmental problems
Can an Agreement Solve
Problem?


A typical agreement
 Signatories agree to hand in red card
 Public display of what is being handed in (red or black)
 Only goes into effect if x% of people agree (eg, 60%)
 Participants post performance bond before each play (who keeps?)
Issues
 Should be self-enforcing (ie, no appeal to higher authority)--problem
 Penalties – how to enforce the agreement?
• Penalties for cheating (ie, not handing in red card)
• Penalties for free-riding (ie, not joining but benefiting from agreement)



Must create an aggregate gain to participants
Must be in best interest of individuals to join (both cooperators and
free-riders) – what if different countries start with different # red cards
Must have means to distribute gain
Back to the Real World
Card game has lessons for the real
world
 Goal: identify desirable characteristics
of international environmental
agreements

How to think of an IEA
Global problem that affects many
countries
 Countries have to voluntarily agree to
do something about the problem
 Any penalties for cheating must be
included in treaty
 There can be no overarching enforcer

Desirable Attributes of a
Successful IEA


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Create an aggregate net benefit to participants
 overall gross benefits > overall gross costs
Distribute the aggregate gain among participants
 For each participant, benefits > costs (individual rationality)
 Self-interest important in convincing country to agree
Deter non-participation
 Must make it undesirable to remain outside agreement
 Trade sanctions most frequently used
 Design net benefits in > net benefits out (participation constraint)
Deter cheating among participants
 Penalties must be credible
 Trade sanctions are easiest to use
Deter entry of new non-participants (avoid “leakage”)
 Particularly appropriate for common property problems
 Saving a fishery increases rents and may induce non-fishing countries to
enter
Montreal Protocol
Designed for CFC’s leading to Ozone Depletion


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Quantitative emission limits for
industrial, transition and
developing countries
Industrial countries pay for
added costs to developing
countries
Trade sanctions for nonparticipants and violators
Initial protocol modest;
gradually tightened over 10year period
Ozone Levels Projected
Source: World Met Org
UN Framework Convention on
Climate Change – Kyoto Protocol
Emerged from Rio Conference in 1992
 US signed and ratified UNFCCC
 Modeled after Montreal Protocol
 Kyoto Protocol (1997) defines emission
reductions for Annex I (developed) countries
 Developing countries largely exempt
 Penalties for noncompliance missing

Montreal vs. Kyoto
A partial comparison
Aggregate Net Benefit?
Distribute Aggregate Gain
Deters nonparticipation?
Montreal
YES
NO
YES
Kyoto
YES??
NO
NO
Deters cheating?
Addresses leakage?
YES
YES
NO
NO
Environmental regulations in
the developing world
Often environment is low on policy priority
list – urge to industrialize
 Policy focus: employment & income
 Diverse instruments used, hard to
generalize.
 Typically market based instruments not as
widely used or effective.

Environmental charges &
funds
Central & East Europe (planned
economies): high pollution last few
decades
 Attract limited international capital
 Instituted some environmental taxes


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But no bite until decentralized
Poland: careful CBA to attract debtfor-nature, unusually successful
Planned economy emissions
fees
Sulfur, NOx, carbon, some
particulates, lead
 Transportation tolls
 Water extraction charges, water
pollution fines, waste management
fees, fertilizer and pesticide fees

Regulations in China
Most populous, poor ($5000 per capita
GDP), one of most polluted countries
 1979 law allows charging for pollution, by
1994 $2 billion collected.

Fees charged when emissions above max.
 Fees too low to achieve standards.

Fees in Rio Negro,
Colombia
Colombian economy growing quickly
 Water/air pollution major problems
 1993 law that environmental damages
must be taken into account

Stipulates use of economic
instruments
 Fees implemented: 28% decline in
pollution in first 6 months

Voluntary emissions control in
Mexico
Informal sector in Mexico: brick
making
 Difficult to monitor, regulate (similar to
non-point source pollution)
 20,000 brick kilns burn nasty stuff

Too difficult to enforce ban on dirty
fuels
 Subsidize propane, voluntary switch
 Zoning for certain activities
 Involve local grassroots

Info & institutions: Indonesia

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Rapid economic growth – drastic exploitation of
resources
“Program for Pollution Control Evaluation and
Rating” (PROPER) – similar to TRI

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Reporting, evaluating, assisting firms
Grades each industry, reports in press
Very successful
Other countries have adopted similar (Mexico,
Philippines, Papua New Guinea)…
Green national accounting

Measures of national income: GNP,
GDP

Don’t account for environmental
degradation and resource depletion
Can give misleading measure of
national “well-being”, may lead to
wrong policy.
 Many adjustments have been
proposed to “correct” standard
measures.

“Natural capital” depreciation
Natural capital: the available endowment of
land and natural resources
 Measure depletion of natural resources (oil,
timber, minerals, soils)
 Subtract from standard measures
 Result: many developing nations show
substantial effect

Indonesia example: “Adjusted
Net Domestic Product”
Pollution control & cleanup
How should pollution control and
cleanup costs be accounted for in
developed nations?
 Should cleanup expenditures
contribute to GNP? Some think not.
 Main issue: don’t double count.
These are legitimate expenditures in
order to maintain environmental
values.

How are national accounts
used?

Primary use: assist policy makers in
government.


E.g. Gov’t expenditures on scientific
research are linked to current
economic performance and climate.
United Nations has proposed a
“System of Environmental and
Economic Accounting”, some
adjustments underway.
Paying for public goods
Public goods will be under-provided,
externalities will not be internalized in free
market.
 Government intervention: tax revenues can
pay for cleanup, regulation, public goods
provision
 But many taxes “distortionary”

E.g. Income tax discourages work!
 Costs $1.40 to raise $1 in revenue

Double dividend

If we substitute distortionary taxes
with pollution taxes, we may earn a
“double dividend”
Reduce pollution (and therefore
damage from pollution)
 Reduce distortionary taxes on labor
and thus the DWL from those taxes

• This is called the “revenue recycling
effect”
A 3rd effect of pollution taxes

“Tax interaction effect”

Polluting good and leisure are substitutes
• E.g. Gasoline and Leisure

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Tax pollution, demand for leisure shifts out
If labor is still taxed, shift introduces an additional DWL
attributed to decrease in pollution
This DWL decreases social welfare.
Overall size of tax interaction effect varies among
polluting industries


Estimate: pollution tax should be set at 2/3 of marginal
damage.
Varies considerably from industry to industry