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Microsoft PowerPoint - 14 - Market Based Instruments - Price

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					                                                                                                            Instrument taxonomy



             Policy for Market Failure:

              Market-based strategies




    Information based: Mandatory
                                                                                                        Market-based instruments
         Disclosure/Reporting
•   Regulators require firms to make certain information publicly available.                        • The two most notable advantages that market-
•   Examples: the toxics release inventory lead paint disclosures, food nutrition
                                   inventory,           disclosures
                                                                                                      based instruments (price and C&T) offer over
                                                                                                                         p
    labels, drinking water quality notices, and eco-labels.                                           traditional command-and-control approaches are
                                                                                                      (Stavins, 1998):
•   Can lead to improved environmental performance via (Kennedy et al., 1994)
     – 1. increasing consumer demand for a reporting firm’s environmental                             – cost effectiveness, and
       performance,                                                                                   – dynamic incentives for technology innovation and
     – 2. increasing a reporting firm’s susceptibility to liability under legal statutes
     – 3. increasing investor and/or employee pressure for reporting firm’s pollution                   diffusion.
       abatement, and
     – 4. increasing community coercion.
                                                                                                      Market-based
                                                                                                    • Market based instruments take advantage of
•   U.S. Toxic Release Inventory                                                                      private information that polluters have about
     – “The Toxics Release Inventory (TRI)
          • a publicly available EPA database                                                         means and procedures they could use to reduce
          • contains information on toxic chemical releases and other waste management activities
            reported annually by certain covered industry groups
                                                                                                      pollution
          • established under the Emergency Planning and Community Right-to-Know Act of 1986
            (EPCRA) and expanded by the Pollution Prevention Act of 1990”




                                                                                                                                                           1
                                                                       Price-based policy examples
                                                                 Fees/taxes/charges to reduce “bads”:
                                                                 • User fees (e.g. at National Parks)
                                                                 • Congestion fees, road tolls (e.g. London
                                                                   congestion charge, 8 £)
                                                                                   (e.g.
                                                                 • Emissions fees (e g GHG tax)

           Policy for Market Failure:                            Subsidies
                                                                 • Abatement subsidies (reduce “bads”)
                                                                    – E.g. NC bill to provide $50B to reduce
                                                                      hog farm waste
                  Price Instruments                              • Subsidies to encourage “goods”
                                                                    – California Million Solar Roofs Initiative
                                                                    – 2008 Farm Bill
                                                                        • $14B in subsidies for rice, cotton, corn,
                                                                          soybeans, wheat and other crops
                                                                        • $27B to conserve environmentally
                                                                          sensitive farmland
                                                                        • $23B crop insurance




  Emissions charge (tax) mechanics                                                    Tax - mechanics
• Given an emissions                                              • Will higher charges
  charge of $120/unit,
  what is the firm’s optimal
                      p
                                                                    bring more or less
  level of emissions?                                                 b t
                                                                    abatement? t?
    • Optimal least costly (cost-
      minimizing)
                                                                  • If the MAC curve
 – Total compliance cost:                Single source of a         shifts down (e.g.
                                         particular pollutant.
    • Total abatement cost +                                        MAC’) does the
      Total emissions fees
                                     Tax has been set               predicted level of
                                     at $120/ton/month
• Idea: each pollution                                              abatement go up or                                MAC’

  source will reduce its                                            down (assuming
  emissions until                                                   the tax is
   MAC = tax. (Why?)
                                                                    unchanged)?



                                                                                                                             2
   Setting an                                                                      Why might bussiness firms be so
                                                                                 strongly opposed to pollution taxes?
   efficient tax
                                                                                pp
                                                                             Suppose the tax is set
     th      f   ti i
• If the MD function is                                                        at t*:
  known then the tax                                                         • Does the tax satisfy
  can be set to produce                                                        the principle of
  the efficient level of                                                       “polluter pays”?
  emissions.
                                       • Work in pairs. Identify:
                                         – Efficient emissions (explain)     • Does the polluter
                                                                                         p
            – When the tax is set        – Given t*:                           pay a total
              equal to the                                                     emissions charge
              marginal damage at             – TAC: Total abatement cost
              the efficient level of         – TEC: Total emissions
                                                                               greater than or less
              emissions we call it              charges (“tax bill”)           than the total
              a “Pigovian tax/fee”           – TB: Total benefit from          damage at e*?
                                                damages averted.




                                                                                 Equimarginal principle
                    Setting the tax                                        • Major strength of emissions charges:
                                                                             – IF same tax rate applied to different
                                                                               sources with different MAC functions

                                                                               (and each reduces it emissions as
• To induce the socially efficient                                             predicted such that MAC = tax)
  level of emissions (e*) it is not
  necessary to charge for each                                                 THEN, MAC will be equalized across
                                                                               sources.
  unit of emissions – we could
  just impose charge on                                                      Cost effectiveness achieved (i.e.
  emissions beyond e1.                                                        emissions reduction of 20 tons/month
                                                                              achieved in least costly way.)
• Note: the total social cost of
                                                                             ***Does the regulator have to know the
  the emissions charges                                                        MAC functions for a tax to be cos
                                                                                   C u c o s o        a o     cost-
  (a+b+c+d) i zero since f
  ( b      d) is       i    from                                               effective (satisfy equimarginal
  society’s standpoint it is just                                              principle)?
  a transfer from the firm to
  government.                                                                ***Is 15 units of abatement from A and 5
                                                                               units of abatement from B the efficient
                                                                               outcome (i.e. the one that maximizes
                                                                               net benefits inclusive of damages)?




                                                                                                                         3
                 Nonuniform Emissions                                         Zoned emissions charge
    Differences in the marginal damage curve




                                                                       • Best response to many firms with different MD curves:
                                                                         zoned emissions charge
  • In reality a unit of pollution from one source                        – Within each zone one tax rate applied
    may cause greater damage than a unit from                             – Assume: the effect on Urban Area, and thus the tax, decreases
    another source                                                          with distance.
                                                                             • Is the equimarginal principle still satisfied within a zone? Between
  • BUT identifying the marginal damage curve                                  zones?
    for every source would be highly costly.                           • Increasing # of zones: Tradeoff between increasing
                                                                         administrative/information costs and increasing cost-
                                                                         effectiveness




                       Incentives to innovate
                                                                          Incentives to innovate are greater under
Work in pairs:                       Story: Initially at MAC1. After
                                     costly R&D, develop new method,
                                                                             emissions charges than standards
• Baseline (MAC1): what level of     move to MAC2. Emissions charge
  emissions is chosen and what is    is constant at t.
  the total compliance cost?
    – TCC1 = TACMAC1 + TEC1 = ?                                        • R&D efforts will lead to a bigger reduction in
                                                                         pollution-related costs for firms (abatement plus
• After innovation (MAC2): what
  level of emission is chosen and                                        taxes) under emissions charges than under
  what is the TCC?
    – TCC2 = TACMAC2 + TEC2 = ?
                                                                         standards.
• What is the firm’s benefit
  (incentive) for innovating (cost
  savings)?
                                                                       • Under emissions charges: a firm will
    – TCC2 – TCC1 =?                                                     automatically reduce its emissions as it finds
• Standards: Suppose instead of
                                                                         ways to shift its MAC function downward (not
  tax t, we have performance                                             necessarily the case under standards).
  standard e1… what is the firm’s
  incentive to innovate?




                                                                                                                                                      4
             Enforcement costs                                                  Subsidy policies
• Most non-point (diffuse) sources of                                        • Payments to reduce pollution (less of a bad)
    ll ti        t be      l t d through
  pollution cannot b regulated th      h
  emissions charges – too costly to monitor                                  • Price supports (e.g. agriculture) (more of a
   – E.g. pollutants in street runoff, agricultural                            “good”).
     runoff.
                                                                             • Deposit-refund systems
                                                                                 – Subsidy is the refund (deposit funds the subsidy
                                                                                   payment).


                                                                             • Subsidy removal




                        Subsidies                                                     Subsidy removal example:
• Pollution context: public authority pays polluter a
  certain amount per unit for every unit reduced                                       Below-cost timber sales
  (starting from some benchmark level).                                      • The commercial activity of moving timber from U.S. public lands into
   – Subsidy generates an incentive in the form of an                          the marketplace frequently costs the Federal government more than
     opportunity cost for polluting                                                       return.
                                                                               it gets in return (implicit subsidy)
                                                                                 – Form of subsidy: (most frequently) credits to private lumber companies
      • if polluter emits a given unit of pollution it forgoes the subsidy         for road building.
        payment.                                                                 – 1964 Forest Roads and Trails Act
                                                                                     • allows the Forest Service to credit logging companies for their expenses in
                                                                                       constructing the logging roads they need to access timber
• Subsidies to reduce pollution are not common.                                      • companies deduct road construction expenses (credits) directly from the
                                                                                       amount they pay the Forest Service for the timber they extract.
  Why?                                                                           – Since government alleviates part of the resource extraction cost it
   – Violates “polluter pays” principle                                            effectively subsidizes the removal of timber.
   – Can potentially lead to more pollution:
                                                                             • Removal of these subsidies could foster environmental protection
      Subsidies decrease levels of pollution by individual firms              and save taxpayers up to (an estimated) $1.2 billion over five years.
       BUT increase overall industry profits encourage new
       entrants into industry  more production  potentially more
       pollution.                                                            (Stavins, 1998)




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