Week 6

• 3 instruments for pollution control

  1. institutional approach to internalise pollution
  2. command and control approach
  3. economic approach
• Command and control


  The government sets up orders / measures / laws / standards, and uses sanctions to enforce compliance. It is a top-down approach.
• 3 instruments in CAC approach

  1. non-transferable emissions license
  2. minimum technology requierment
  3. location
• Non transferable emissions licenses

  Are issued to emitors to control the total allowable quantity of emissions
• Necessary conditions for the non-transferable emissions licenses

  1. cannot be transferred
  2. schemes are supported by monitoring systems and there are penalties for noncompliance
• Minimum technology requirement

  When the characteristics of production processes or equipment are specified. Normally called BAT (Best available technology)
• Critiques of minimum technology requirement

  • decreases the choice available to firms in how they want to reduce emissions
  • unfair impact on individuals and small businesses
  • lacks cost-effectiveness
  • pass / fall system means that there is no incentive to invent
• Location

  By zoning, pollution sources are confined to a particular area to reduce human exposure.
• Critiques of Location

  • moving people away / grouping factories does not decrease emissions, it is only more convenient
  • efficient but it does not fulfill cost effectiveness
• Positives of CAC methods

  • certainty in outcomes
  • 'power' to get the results quickls
  • proven success
  • pollution should not be marketized as it is immoral (Sandel's Theory)
• Negatives of CAC methods

  • not cost-effective
  • economic equilibrium can hardly be met
  • no way to ensure the least cost theorem between difference CAC programmes is met
• What is the economic approach?

  It is an incentive based approach, which uses the market to achieve cost-effectiveness.
• Economic approach examples:

  • emission tax
  • emission abatement subsidies
  • marketable emissions permits (tradable)
• Marketable Emissions

  Concerns the total quantity of emissions, but does not attempt to determine how they are distributed. The cap and trade system is the main type.
• Cap and trade system, how does it work?

  1. deciding the cap
  2. creating the number of permits
  3. choose an allocative method (ex. auction)
  4. laying out the principles (ex. liability regulations)
  5. setting up monitoring system
• Why is the cap and trade system important?

  Because it turns the pollution, a public good, to a private one, which makes it excludable. Hence a market is created.
• Challenges in tradable permit schemes

  • Market thinness = not enough operators to create a competitieve market
  • transaction costs exist
  • risk of a monopoly
• What pollution control instruments are cost effective?

  • emission tax
  • emission abatement subsidy
  • marketable permit system
• What pollution control instruments are efficient at monitoring and enforcing compliance costs?

  • minimum technology requirements (one-off administering costs)
  • CAC is cheap
• What pollution control instruments have the net income effect?

  • CAC does nothing, the income does not flow to the gov
  • Effect experienced in tax / subsidy
• No regret policy

  The policy approach that is worth doing now regardless of which scenario plays out. (ex. climate change)
• Counter arguments to the no regret policy

  • policies can adversely increase some communities' vulnerability to climate change
  • the lack of evidence may induce unnecessary hesitancy in future policy
• Rebound Effect

  The difference between the expected gain and the actual gain from efficiency improvement is due to the increase of consumption, and thus the gain is cancelled out or taken back.
• Double dividend hypothesis

  When environemtnal taxes can have two benefits: to reduce pollution and use the generated revenue to displace other taxes. HOWEVER, fi you tax the producers then they will just transfer the costs to the consumers.