Contemporary environmental problems

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					Contemporary environmental problems

Road transport

Road transport is implicated in many environmental problems. It is the most important source of
air pollution in cities; the major cause of noise to households; and next to air transport the fastest
growing source of carbon dioxide emissions. It is responsible for thousands of fatal and non-fatal
accidents every year and despite massive investment in transport infrastructure traffic speeds are

Any vehicle on the road imposes an external cost on other vehicles by slowing them down and
hence increasing journey times. The basic idea of road pricing is that by charging all users of the
road a fee equal to the costs of the time delay that they impose on other road users that these time
delays are reduced. This occurs partly by dissuading those whose journeys is relatively
unimportant from travelling by road and partly by encouraging them to reschedule their journeys
away from peak times.

Abstracting from the other external costs of road transport, the costs of using a road have three
elements. These are the own costs of using the uncongested road, the congestion cost faced by
each individual road user and the congestion costs imposed by the individual road user on
everyone else. The first two costs are internal and represented by the average social cost curve.
The tendency is for traffic flows to expand to the point where the average social cost curve cuts
the marginal social benefit or demand curve. At that point the private cost incurred by the last
motorist is just equal to the benefit that he obtains from his journey. In other words the motorist
is indifferent towards undertaking the journey or not despite the fact that he is imposing positive
congestion costs on all other road users. By contrast the efficient flow of traffic is where the
marginal social cost curve crosses the marginal social benefit curve.
The socially optimum traffic level may be achieved by the imposition of a tax. The size of the
tax should equal the difference between the social and the private costs of the last kilometre
travelled at the optimum. The total amount of revenue that would be raised is equal to the tax
multiplied by the number of trips. Note that the net gain to society from moving from a position
of no regulations to the position of the optimal regulation is not the same as the total costs of
traffic congestion. The total costs of road congestion are the total costs minus the costs that
would be incurred if the same flow of traffic were made on an uncongested road network.
Congestion as a phenomenon will not disappear totally after introducing a correct congestion
pricing. Note that as the demand for the use of the road increases (e.g. during the rush hour) the
demand curve shifts out and the optimal tax increases as well as the traffic flow and the level of
congestion. Whilst society gains following the implementation of the optimal tax it is possible
that the road users could en masse experience a decline in welfare. It prices some commuters off
the road altogether and remaining commuters may not realise a sufficient decrease in journey
time to compensate for the congestion tax payments. There is a transfer of welfare from the road
users to the rest of society. The rest of society could at least in theory compensate the road users
and still be better off.

Turning to the implementation of road pricing, using conventional tolling involving lanes and
booths to collect a payment is not a very attractive option. Although such a system is used in
countries like Italy these tolling systems create backlogs of traffic and delays during peak times
and actually cause traffic congestion. Most of the interest has been on the possibility of
electronically charging for access to the centre of cities. Hong Kong was the first country to
experiment with electronic road pricing. At one time Singapore operated a system of area
licences whereby individuals had to purchase coupons allowing them to use the roads at
particular times. This has now been replaced by electronic road pricing. Mexico and Athens have
systems that limited the number of vehicles that can drive in the city to those which have
particular licence plates (odd or even numbered). Norway has a system of cordon pricing
whereby anyone wishing to pass through the cordon surrounding any major city has to pay.
London now has a similar system.

More conventional measures can also be used to tackle traffic congestion but note that any
instrument that cannot be varied across time and space (such as vehicle duty and fuel tax) is not
likely to be very useful at least in this context. By far the most widespread measure to deal with
traffic congestion involves the use of parking restrictions of one form or another as a means of
dissuading motorists from using private transport in city centres. Another popular suggestion is
to subsidise public transport systems but this only works to the extent that public transport and
private transport are substitutes.

Considering the problem of traffic accidents, some commentators are clearly impressed by the
fact that when vehicles collide they impose „external costs‟ on each other. From this they reason
that all accidents represent external costs. The definition of „externality‟ however means that
accident costs are external only insofar as the marginal journey increases the likelihood of any
other road user having an accident. It may be that the only individual to suffer increased costs
from the marginal journey is the individual road user himself. In this case the marginal external
costs of accidents would be zero. But even if accident rates are shown to be independent of the
number of vehicle kilometres there may still be external costs from road traffic accidents. The
individual road user seldom pays for the costs of medical treatment, the cost of lost tax revenues
and the administrative cost of an accident. It may also be necessary to have taxes to correct for
the chronic underestimation of risk.

Finally we consider the environmental costs of road transport. Unlike with congestion costs these
costs are borne by everyone. And unlike accident costs, there is no doubt that these costs are
external. There are three important characteristics of emissions from road transport of which any
possible policy must take heed. First, emissions differ substantially between vehicles according
to the characteristics of the vehicle. Second, the marginal damage of emissions will vary
enormously over time and space for all but a handful of pollutants. Most emissions are not
perfectly mixing but are instead localised in their effects. What this means is that the same
emission has the potential to harm many more individuals if it is released in an area of high
population density at low level. Thirdly, the emissions from individual vehicles cannot currently
be monitored.

Given the impossibility of monitoring emissions most countries have adopted a command and
control approach to regulating vehicle emissions. These require that vehicles reach certain
emission standards before they can be sold. But how is it possible to encourage motor
manufacturers to research in the development of new technologies? Reliance on standards does
not achieve this. Once these standards are reached there is no incentive to go beyond them.
Taxing the purchase of vehicles with poor environmental characteristics gives motor
manufacturers an incentive to spend money on researching new technologies. Many countries
also have differential purchase taxes that, apart from encouraging research, also improve the
characteristics of the vehicle fleet.

The emission characteristics of vehicles can change markedly over time particularly if the
vehicle is not well maintained. It is possible to legislate for periodic checks of road-worthiness.
But these checks are anticipated and provide no continuing incentive for drivers of gross
polluting vehicles to maintain their vehicles in a better way. By contrast roadside checking
provides an ongoing incentive to attend to the emissions characteristics. The difficulty with this
policy is that it is dangerous to allow vehicles to be pulled over in this way. But at least such
policies can also be implemented with differing degrees of vigour.

Old vehicles are infinitely more polluting than new vehicles. Therefore there is a desire to
shorten the time to scrapping of the existing vehicle fleet. But there is also a concern about the
disposal of old vehicles. These two concerns point in different directions: on one hand one would
like to encourage a rapid turnover of the vehicle fleet in order to take advantages of the
improvements in the emissions characteristics of newer vehicles and on the other to postpone the
costs of disposal.

Taxes on fuel can be differentiated according to the environmental consequences associated with
the use of those fuels. These differentials ought to reflect difference in marginal damage from the
combustion of fuel in normal conditions. The problem with fuel taxes is that there is only a low
correlation with emission of pollutants and also that they cannot be varied temporally or
spatially. This means that fuel taxes have a very limited role except in so far as they are the first-
best instruments for dealing with emissions of carbon dioxide. This is because there is no means
of removing carbon dioxide from vehicle emissions and there is a strict correspondence between
the quantity of fuel used and the emissions of carbon – most pollutants are different. At the same
time however, vehicle use is not the only source of carbon emissions and there is need to make
sure that the marginal costs of carbon abatement are equalised across different sectors. There is
some basis for the view that vehicles are excessively fuel efficient, given that fuel efficiency is
itself a costly characteristic of motor vehicles. There is even the theoretical possibility that
greater fuel efficiency encourages the consumption of more fuel.

Vehicle excise duty serves even less purpose. It is quite unconnected with any of the damaging
aspects of vehicle use. Most commentators would agree that there are arguments for moving the
taxation of vehicles away from ownership and towards use variable taxes.

Achieving additional control over emissions in areas of high population density is important. The
same policies that influence traffic congestion are also likely to be useful in this context. These
include increasing parking taxes and subsidising public transport. Assuming that public transport
is cleaner in terms of passenger kilometres once again begs the question of the extent to which
public transport and private transport are substitutes. Finally it is clear that any scheme to charge
vehicles in city centres ought to take account of the effect of road pricing or cordon charging on
both congestion and also on the available improvements in air quality. This improvement takes
place for two reasons. Firstly there are fewer vehicles on the road meaning less pollution.
Secondly remaining vehicles are moving faster and there is a known relationship between
vehicle speed and emissions per kilometre.

Acid rain

Acid rain comprises the acidic depositions of sulphur dioxide, nitrous oxides and chlorine either as
dry gases or particles, or as wet deposits in rain, sleet, fog or snow. Most sulphur dioxide comes
from large combustion plants the majority of which burn coal but some emissions are non-
anthropogenic in nature. Sources of nitrous oxide differ with a higher proportion coming from
transport. Most of the pollution falls to ground within 300km in its dry form. Long-range transport
is in the form of wet deposition and may be up to 2000km away from its source.

Damage to lakes and to fish stocks arising from acid rain is well documented. It appears to occur not
because of the acidity itself but rather through the release of aluminium associated with it. Because
it is a stock-pollutant as well as a flow-pollutant the acidity of lakes is relatively insensitive to short
term variations in emissions. This explains the paradox of falling sulphur dioxide emissions and
rising acidity in lakes and soils. Damage to forests is also prevalent is the damage to limestone
buildings. Sulphur dioxide is a precursor of small particulate matter which has a variety of adverse
health impacts including premature mortality. Acid rain may have a secondary effect on health by
releasing heavy metals into drinking water.
There are two major means of reducing sulphur emissions from power plants: fuel switching and
flue gas desulphurisation (FGD). This technique mixes limestone sludge and sulphur dioxide and
converts it into gypsum. This material is then either dumped or sold. It has a number of low value
uses but is in any case quite plentiful. There are three specific factors that determine the costs of
controlling sulphur abatement: the percentage reduction in emissions required; the sulphur content
of the flue gases; and the size of the plant. It also costs much more to retrofit pollution control rather
than have it installed at the outset.

Using technical information it is possible to build up a picture of the marginal costs of abatement for
sulphur. This entails measuring the costs of abatement and ranking them in terms of increasing costs
per tonne of sulphur abated. This is more difficult than it sounds because some measures have the
propensity to interact. For example, FGD saves less sulphur if simultaneously accompanied by fuel
switching and improvements in energy efficiency save less sulphur if simultaneously accompanied
by reductions in the sulphur emitted per unit of electricity consumed. There is also the possibility of
reducing some of the adverse effects of acid rain by putting lime into acidified lakes.

The European Monitoring and Evaluation Program was set up to determine the eventual
deposition of the emissions from various grid squares within Europe. Naturally these refer to
average weather conditions measured over a number of years. The result of this work is a
transport matrix of coefficients (sometimes called the „blame matrix‟) that converts a vector
of emissions into a vector of depositions:

q = Te

Where q is an i x 1 vector of depositions, e is a vector of emissions and T is the transport matrix.
The first row of the T matrix gives the fraction of each country's emissions that are deposited in
each location. The leading diagonal of the matrix gives the fraction of each country's emissions that
are deposited within their own borders. These quantities are generally quite significant.

Assuming that damage costs and abatement costs are known an efficient policy for
controlling acid rain is one that minimises the overall social costs (i.e. damage plus
abatement costs). The problem can be expressed as:

Min (wrt ej) Σ Cj (e*j – ej) + Σ Di (Σtij ej)

Where Cj is the cost of abatement for source j, e*j is the no control level of emission, ej is the
controlled level of emissions, Di is the damage function for receptor i and tij is the fraction of
source j's emissions deposited at receptor i. The first order conditions for optimality are:
C‟j = Σ D‟i tij

This states that the rule for optimality is to equate the marginal costs of abatement for each source
with the sum of the marginal damages at each receptor point. In theory this problem seems to
suggest an ambient permit system. Unfortunately the transaction costs of this method are high and it
may be necessary to compromise by calculating the optimal cutback in emissions for each country
and then issuing the required permits as envisaged by the zonal permit system. The compromise is
that even though permits change hands on a one for one basis within each country they may
nevertheless have differential effects outside because of the height of the chimneystack and the exit
velocity of the flue gases. A uniform reduction of emissions either within or between countries is
highly unlikely to be cost minimising. Taxes on fuel inputs or outputs are also unlikely to represent
the cost minimising policy solution.

The above analysis presupposes that countries are prepared to co-operate with one another rather
than acting in a way dictated by self-interest. If instead each country takes the emissions of all other
countries as fixed and attempts to maximise its own net benefits (a concept known as the Nash
equilibrium) the resulting emissions levels can be found by solving the following equations:

C‟j = D‟i tii

In other words each country balances the marginal costs of abatement with domestic marginal

Maler compares the current levels of emissions arising from a non co-operative Nash game and
compares them with the full co-operative solution. The optimal level of emissions would be 39%
lower throughout Europe as a whole but there are wide variations between different countries. Some
countries by virtue of their geographical position should abate by up to as much as 86% (Greece,
West Germany), 83% (Romania) and 81% (the UK). The net benefit of the efficient solution
compared to the Nash solution is DM 6,290 million per annum. These gains are widely distributed
but some countries actually lose. Foremost among these is the UK that loses DM 336 million. The
explanation for this loss is that the UK by virtue of its position on the Western fringe of Europe
stands to benefit very little from reductions in other European countries (Ireland is an insignificant
emitter). The implication is that without a system of side payments the UK will never agree to the
efficient solution - the victims must pay the polluters. Maler finds that imposing the constraint that
all countries should reduce emissions by an equal proportion increases costs by 76% relative to
differentiated cutbacks.

The first sulphur protocol organised through the UNECE committed its signatories to reducing
emissions of sulphur dioxide by 30% in 1993 (relative to 1980 levels) and thereafter to further cuts.
The UK refused to sign this protocol. European Community Policy also influences national policies.
The Large Combustion Plant Directive signed in 1988 set standards for sulphur dioxide and nitrous
oxide emissions from new power plants and introduced a plan to cut emissions from existing plants
by 60% by 2003 on a 1980 baseline. This led to a major programme of FGD retrofitting. The
second UNECE sulphur protocol was drawn up in 1994 and committed its signatories to cut
emissions by various amounts relative to 1990 levels. The UK signed this protocol and is now
obliged to cut its emissions by 80% by 2010.

The UK currently plans to meet its commitment by allocating quotas to various industries and
companies. The cutbacks implied are not uniform and cannot be traded. Furthermore within these
quotas the chosen instrument of control is best available control technology not entailing excessive
cost. The Swedish have a nitrogen dioxide charge that was introduced in 1992. This applies to a
small number of large industrial plants and power stations. The charge is based on measured
emissions with the option of presumptive measurement (measurement costs are significant).
Revenues are returned to plants in proportion to energy output. In the US the acid rain problem is
controlled by a system of tradable emission permits issued to power generators. These permits can
be traded and banked (but not borrowed from the future). Environmental groups can even purchase
emission permits and retire them.

Note that when negotiating targets arguments over the baseline year against which cutbacks are to
be measured are likely to be long and protracted. The reason is that recent baselines tend to
disadvantageous to those countries that took early action and already have some abatement
measures in place. There are also clearly incentives to misrepresent abatement costs and damage
costs in order to maximise the scale of any side payment. Furthermore, whilst it may be in the
interests of the group as a whole to reach an efficient solution, individual incentives might point
towards defection thereby securing even greater benefits for some countries. Monitoring of
compliance is therefore likely to be important.

Tropical deforestation

What is the extent of tropical deforestation and why is it a concept that is difficult to measure? Why
should we care? Uncertainties in the impacts of deforestation are partly a function of uncertainties in
the rate of deforestation itself. Deforestation estimates are nowadays based upon remote sensing
prior to which no information was available. Historical data are almost entirely lacking. Even then
there are different definitions of deforestation - total clearance, selective logging, degradation etc.
Estimates based on remote sensing are also highly sensitive to resolution and sampling coverage.
Leaving measurement problems aside, the total forest area in the tropics appears to have declined by
about 8% over the period 1980-1990.

There are good reasons why we ought to be concerned about tropical deforestation. Atmospheric
concentrations of the greenhouse gases including carbon dioxide and methane have been increasing
rapidly over the last few decades. Most of these emissions are due to the burning of fossil fuel but
also to a significant extent by deforestation. In the 1980s carbon emissions from change in land use
contributed 1.6GtC annually compared to 5.4GtC from fossil fuel burning. Carbon is released from
deforestation at different rates according to the method of clearance employed and the subsequent
use for the land. Conversion to shifting agriculture, pastureland or permanent agriculture all result in
a net release of carbon typically in the order of 100-200tC/ha. Deforestation is also responsible for
soil erosion and changes in the microclimate.

Past deforestation is estimated to have led to the extinction of between 1-11% of all species per
decade. These estimates are made by postulating mathematical relationships between the number of
species present in an area, the bio-geographical region, taxa group and population density. Most of
these extinctions are of species unknown to science. Many of these plants might have been of
potential use to medicine indeed 25 percent of medicines prescribed in the US are derived from
plants. Apart from the potential uses of this genetic information the tropical forests also possess
intrinsic (cultural) values. These values are expressed as sympathy for both the forest dwellers as
well as the animals that live there. There are also significant educational benefits from the
preservation of the forests. A survey of US households revealed a willingness to pay of between $29
and $51 to protect just 5 percent of the tropical forests.

One can usefully distinguish the proximate and the fundamental causes of deforestation. The
proximate cause of deforestation include things like forest destruction through logging, slash and
burn agriculture, cattle ranching, infrastructure developments. The majority of deforestation appears
to result from slash and burn agriculture rather than from logging. The proximate causes are the
symptoms of the underlying or fundamental causes.

It is useful to divide further the fundamental causes of deforestation into two factors: competition
for space and failures in the working of the economic system either at a national or a global level.
Competition for space between man and other species is evidenced by the conversion of land to
agriculture and infrastructure. This raises the question of whether some degree of tropical
deforestation in any sense optimal. Each land use option (development, preservation) has associated
with it a particular economic value. Tropical deforestation is only a problem if inappropriate low
value land use options are currently being chosen. An alternative (though not mutually exclusive)
hypothesis is that deforestation occurs because the failure of economic systems to reflect the true
value of preserving the forests. At a local level this can occur because those who convert the forest
lands to alternative uses are not confronted with the costs that this imposes on others in terms of
sedimentation of the rivers and changes to the micro climate.

Property rights in the Amazon for example are not well established. Recognition of rights has in the
past been granted if the land was cleared. Here is an obvious cause of inefficient deforestation.
Property rights should be allocated without linking them to specific actions. With insecure property
rights individuals have an incentive to extract as much of the value from forests as they can within
the shortest possible time rather than to manage a forest in a manner that could be described as
sustainable. Insecure property rights might also explain why some researchers have found that
sustainable harvesting of the non-timber products of forests (e.g. latex production, vegetable ivory)
can result in profits exceeding those available from clearing the land for agriculture resulting in
what some researchers have called “nutrient mining”.
In some countries there may also be a link between deforestation and the demand for fuel-wood.

There is a connection between deforestation and national government policies. Effectively the
government can be subsidising activities that favour the conversion of land to alternative uses.
These include subsidising agricultural production, providing tax incentives for capital investment in
forest areas and subsidising exports.

One of the most important subsidies is road building. Individuals are not generally required to pay
for the costs of the road that they travel upon. With agricultural produce and timber distance to
market is an important determinant of economic viability. As distance to market increases these
activities become less and less profitable especially if the terrain over which these goods have to be
transported is difficult. It is for this reason that early deforestation occurred close to rivers that
provided an easy means of transport. The effect of building all-weather paved roads has been to
dramatically reduce the costs of transport meaning that loggers and agriculturalists can penetrate
even further into the forest. In the view of some road building is the single most import cause of

The international timber trade is not necessarily the villain in terms of deforestation that many
people believe it is. For one thing most deforestation occurs for reasons unconnected with the
timber trade. Secondly most of the timber that is felled appears to be for domestic markets rather
than for export.

It must further be realised that loggers are interested in only a few species of tree, for example
mahogany. But in their attempts to fell and extract such a species it is claimed that for every tree
extracted 27 other trees are damaged or destroyed in the process. There is therefore considerable
scope to reduce the environmental impact of logging. This includes directional felling, strategies to
allow regeneration of the forest etc. Nevertheless it is difficult to see why loggers should follow
such strategies when they perceive the forest to be almost limitless. But one possibility might be to
certify timber that has been harvested following a good code of conduct. Consumers in developed
countries pay for the satisfaction of knowing that the timber they buy has been produced in a
particular manner.

Many developing countries fail to tax logging companies adequately thus handing significant rents
to the loggers. Part of the reason for this is corruption but the implication is that the concessionaire
has every incentive to extract as much as possible from the concession because if he waits until the
concession is renewed the terms may be less favourable. The shorter the concession, the more
intense these incentives are.

Is there a link between foreign indebtedness and the rate of deforestation? Some environmentalists
point to the export potential of tropical timbers and agricultural commodities. Forest clearance may
be involved in the production of both of these commodities. One way of testing the hypothesis that
there is a link between debt and deforestation is through statistical regression analysis. These studies
try to link patterns of deforestation to many other variables besides indebtedness including
population density, income, road building, agricultural prices, timber prices and fuel prices. The
work done in this area attributes less explanatory power to debt than to more obvious variables such
as national income or primary product prices. The evidence provided by one such study reveals an
insignificant debt variable in 14 out of 20 studies, with the debt coefficient having the wrong sign in
2 more.

Turning finally to the question of what should be done to protect the forests; the answer appears to
be for national Governments to protect better property rights and to end subsidies to activities
promoting deforestation. But even this might not be enough since there are also missing markets for
the global services rendered by forests. Economists refer to this as global appropriation failure.
Because these services have the nature of public goods it is impossible to exclude non-payers from
benefiting from the service. Because the nations who own the forests cannot extract payment from
the developed countries in exchange for the global services that the forest provides, they have no
incentive to preserve them. Instead they are liable to convert the forests to uses such as agriculture.

The role of the forests as a repository of carbon is an example of a global service. Recent work
suggests that the economic value of storing one tonne of carbon might be $20. Thus the value that
should be ascribed to a hectare of forest might be $4,000. This can be compared with the benefits of
land conversion in Rondonia estimated at $300 as a measure of global appropriation failure. The
Climate Change Convention explicitly recognises that it may be cheaper to create sinks for carbon
in another country than to reduce domestic emissions. The first joint implementation agreements
have been struck between Norway, Costa Rica and Nicaragua. The Norwegians have paid $2
million to reforest areas of land and in return receive credit for the carbon sequestered.

A similar problem presents itself in terms of allowing the forested countries to appropriate the
benefits of the genetic material stored in the forests. Currently there is little incentive for the drug
companies to pay for the use of this genetic material when they can get it for free. Ideally access to
this material would be controlled so drug companies would pay royalties on products that use
genetic information culled from the Amazon. In fact some private financial transfers have also been
agreed such as that between Merck (the World's largest pharmaceutical company) and the
government of Costa Rica. The Costa Ricans collect plant and animal samples and supply them to
Merck for analysis. In return Merck pays a fixed fee plus royalties of any new drugs that might be
developed from these samples.

Calculating the value of tropical forests arising from their potential value to medicine is very
difficult. Calculating the probability that a plant will prove to be useful and multiplying that
probability by the average benefits provided by medicines derived from plants in the past is one
possibility. These estimates need to account for the costs of screening and drug development as well
as the risk of redundancy and overlap between the drugs derived from different plants. A typical
hectare of forest might be worth $20 from this perspective.
A number of organisations have started to sell timber that is certified to come from sustainably
managed forests. Consumers say that they are willing to pay more for timber from a sustainably
managed source although some suppliers have expressed doubts as to whether this is actually the
case. A final way of appropriating the benefits of the forests is through eco-tourism. Rather than
allowing tourists to enter the forest areas for free tourists are charged the revenue maximising price.

Litter and Municipal Solid Waste Management

The amount of waste produced annually by society is increasing in line with economic growth.
Landfill sites are scarce and, like incinerators, politically difficult to place with long lead times
before they become operational. The costs associated with waste disposal naturally depend on the
option selected, but they are typically significant. There is the financial cost of land, vehicles and the
labour required to effect disposal. There is also the environmental cost of transport and the loss of
amenity. There are risks to health from air pollution if the waste is incinerated. There is a risk of
disease carried by vermin. There is also possible contamination of ground water supplies and
greenhouse gas emissions. There are even a few benefits in the form of electricity generation from

The „guiding star‟ concept of the European Union‟s „waste hierarchy‟ suggests a method for
selecting disposal options. According to the waste hierarchy the best solution to the problem of
waste is not to produce waste at all. Failing that society should recycle waste and failing that we
should compost it. Further down the hierarchy is incineration and at the very bottom landfill. The
problem with the waste hierarchy is that these guiding principles are not obviously based on the
principle of social cost minimisation. This entails equalising the social marginal cost of disposal
across all available options.

Two comments are in order at this point. First of all it is important to equalise the marginal social
costs rather than the marginal financial costs of different disposal options. A waste disposal system
that minimises overall financial costs might look quite different to one that seeks to minimise social
costs. A second issue relates to the fact that recycling obviates the need for disposal. What this
means is that although recycling is to some extent privately profitable it should be carried out to a
much greater extent. The optimal mix of options is the point where the marginal social cost of
recycling is equal the marginal social cost of disposal. Once again remember that recycling like
disposal, generates external costs.

Even if it minimises the costs of disposal through disposal and recycling a basic problem of the
system outlined is that it provides no incentive to reduce the amount of waste that is produced.
Indeed, policies can be divided into those that discourage the production of waste; those that
discourage the act of illegal disposal; and finally policies that correct for any remaining external
costs encountered in the act of authorised disposal in order to get the best mix of disposal and
recycling options.
Dealing with policies intended to reduce the total quantity of waste being produced. The most
obvious policy is to levy taxes upon products that result in waste. The assumption here is that it is
easier to monitor the production and sale of commodities than their ultimate disposal. One much
discussed (and bitterly opposed) measure is a „packaging tax‟ on paper and cardboard. That
packaging has a value must be borne in mind when setting the level of the tax. It is intended to keep
the product clean, to facilitate its handling, boost its appeal and also to prevent damage. A more
radical scheme involves households weighing their own waste and self-reporting the amount for
which they are responsible. But this suggestion suffers from a clear problem with households
engaging in non-authorised disposal.

There is also the possibility to address the problem through product standards and regulation. This
might entail regulating the manner in which a product is packed and avoiding built-in obsolescence
leading to early disposal.

There are a number of policies intended to discourage the non-authorised disposal of waste. The
most obvious of these is the creation of litter wardens and special patrols to catch fly tippers. But
they depend on catching individuals and punishing them to the extent that it serves as a deterrent to
others. But fines that are sufficiently high to deter potential offenders may not be credible. There are
also by-laws that enable councils to close a firm that is causing a public nuisance in the sense that its
customers are dropping litter such as fast food containers. This encourages firms to create their own
litter patrols. A further possible response to non-authorised disposal is to increase the density of
authorised disposal points but there are clear limits to this as disposal points are themselves
unsightly and increasing the number of collection points might sharply increase the cost to the
public purse.

Some companies organise their own deposit refund systems for things like bottles and other sorts of
containers. The deposit that they offer is based on the value to the company of the returned
containers after their collection and cleaning. The company is not interested in minimising the
environmental costs of non-authorised disposal. But any scheme might nevertheless be adapted to
take account of these costs as well. Deposit refund systems also provide an incentive for
unemployed individuals to set about collecting litter.

Presumptive charges are regularly used for products whose careless disposal might result in
pollution to the environment such as car batteries, engine oil and pesticides. A charge is added to the
commodities before the sold and only refunded when the used commodity is presented to an
authorised disposal point. Ideally the charge reflects not only the social costs of non-authorised
disposal as well as the cost of proper disposal. Only the former is refunded to the purchaser whilst
the latter is intended to reduce consumption of the commodity.
Increasing the cost of virgin materials that compete with reused materials is another strategy. This is
part of the rationale for the aggregate tax and also a powerful argument on placing a tax on the
stripping of peat for horticultural use (although both these activities deserve to be taxed for reasons
quite separate from wishing to minimise waste disposal costs). It is also possible to set regulations
increasing that have the effect of increasing the demand for recycled goods. There is in the United
Kingdom a regulation that stipulates newsprint should be at least 70 percent recycled.

The United Kingdom has a landfill tax whose value differs for inert and active waste. The rationale
for this tax is twofold. It will to some extent be passed backwards to business and industry sending a
signal about the true costs of waste disposal via landfill. Secondly it is intended to promote
recycling. The incentive works because recycling relieves the cost of landfill. The landfill tax
appears to be based on the view that those who operate waste sites do not account for the social
costs of landfill.

The landfill tax has a number of problems. There is anecdotal evidence of an increase in the
prevalence of fly tipping. Secondly there is something called the landfill tax credit by which site
operators can offset the costs of the tax by making donations to environmental trusts engaged in a
limited number of activities. Hypothecating the funds in this manner is bound to mean that some
projects are undertaken with a low rate of return. There is also the problem in that some methods of
disposal are taxed others (such as incineration) are not. This could lead to a diversion of waste from
low cost disposal options to high cost ones.

There are a number of directives governing waste disposal in the European Union. Chief among
these is the Landfill Directive limiting the amount of biodegradable municipal waste that can be
disposed of by landfill. The directive calls for a 65 percent reduction on 1995 levels by 2016. A
tradable permits system is proposed to meet the requirements of the directive. The directive also
limits co-disposal of hazardous wastes. That the European Union should have set uniform standards
is troubling since disposal costs are likely to vary immensely between densely and sparsely
populated countries. Insisting that each region should be responsible for dealing with its own waste
is a costly restriction.

There is an incineration directive that limits the emissions of waste incinerators and a Packaging
Waste Directive that requires half of all packaging by weight to be recovered. Finally there is a
recent directive on end-of-life vehicles that requires manufacturers to limit their use of hazardous
materials, insists on the treatment of end-of-life vehicles and sets limits for the recovery and reuse
of materials from such vehicles.

Climate Change

A certain fraction of the incoming short wave solar radiation that manages to reach the surface of
the earth is reflected straight back in the direction of space. The remainder is absorbed by surface of
the planet and warms the air that comes into contact with the surface. Any remaining energy is
reflected back into space in the form of long wave radiation but certain elements in the atmosphere
called Greenhouse Gases (GHGs) are partially opaque to this outgoing radiation and absorb its
energy. This serves to raise the temperature of the planet until equilibrium in the form of the earth's
radiation balance is restored.

Anthropogenic emissions of these GHGs have been increasing rapidly since the time of the
industrial revolution. The relatively long atmospheric lifetime of some of these gases makes the
enhanced greenhouse effect the most compelling explanation of the recent rise in global
temperatures. By far the most important GHG is carbon dioxide, which arises predominantly from
the burning of fossil fuel and the clearing of tropical forests although a large number of other gases
such as methane from agriculture are also implicated.

The current expectation is that a doubling of the concentration of carbon dioxide in the atmosphere
is likely to lead to a 2.5°C rise in average global temperature and a change in patterns of
precipitation. Elevated global temperatures will impact upon the exchanges occurring within the
hydrological cycle. Net flows from freshwater lakes, glaciers, ice caps, manmade reservoirs or
groundwater into the oceans plus the thermal expansion of the various layers of the oceans may
cause the sea level to rise.

Given the historically unprecedented rate of climatic change major damage to ecosystems can be
anticipated along with losses of low-lying land. Some vector borne diseases such as Malaria may
increase. There may be an increase in the number and the intensity of storms and hurricanes.
Climate change could have a profound impact upon agriculture but it is by no means clear that
limited climate change would everywhere be detrimental to production. On the other hand a warmer
climate might reduce cut heating bills and benefit tourism in many high latitude countries.

Most of the early discussion for the control of GHGs focussed upon the idea of a carbon tax. This is
a tax on fossil fuel that is in proportion to the carbon content of the fuels. This means that the tax
would be highest on coal that contains the largest amounts of carbon and much less on gas, a
relatively clean fuel. Biomass fuels would not be taxed at all since whilst there releases of carbon
dioxide during carbon dioxide this is no more than what has been absorbed by the biomass whilst it
was growing. Wind power, wave power and solar power would not be taxed at all. Unlike a mere
tax on energy this would encourage substitution between different fuels as well as promote greater
energy efficiency. The higher cost of carbon intensive goods reduces consumer demand for these
products. The weakness of the carbon tax is that it might be highly regressive given that the
percentage of share of expenditure on fuel is much higher in poor households. Insofar as other gases
are implicated in global warming, emissions of these taxes should be also be taxed according to
their „global warming potential‟ or carbon dioxide equivalent. Given that energy use is associated
with numerous external effects besides carbon emissions a carbon tax is likely to produce ancillary
benefits which ought to offset part of the cost.
Often energy is subsidised in former communist countries or developing countries in the erroneous
belief that this promotes economic growth. Many governments in developed countries are likewise
encouraging the consumption of coal that would not otherwise be economically attractive. As a
means of reducing carbon emissions it seems preferable to look first at eliminating subsidies. It is
also clear that, in some countries, carbon taxes might possess an environmental „double dividend‟.
More precisely, insofar as countries suffer from urban air pollution problems that they have failed to
do anything about, the imposition of a carbon tax might as a side effect, have an immediate
beneficial effect on the environment.

A complementary strategy to trimming emissions of carbon is to reabsorb or sequester carbon by
planting forests. A cost minimising strategy for limiting national emissions would certainly have to
include carbon sequestration as an option although it is important to realise that only growing trees
fix carbon. Once a forest is fully-grown it absorbs no more carbon. In the future it might even be
possible to separate out carbon dioxide from the emissions of power stations and then to store it
underground or under the sea.

An important characteristic of GHG emissions is that in terms of the damage done it does not matter
whether emissions are in India, China or Britain. Rather than setting national targets a system of
internationally negotiable permits would minimise the overall cost of reducing emissions. Countries
able to abate pollution at lowest cost will be encouraged to reduce emissions and sell permits.
Countries with high costs of abatement will buy permits on the market to avoid costly reductions in
domestic emissions. The allocation of these permits is from the perspective economic efficiency
irrelevant since trading ensures that they always end up in the hands of those nations who value
them most highly. But from the perspective of international incidence the distribution of these
permits matters immensely. Even if a system of internationally tradable permits does not finally
emerge, enabling countries jointly to implement their carbon emissions, limits might succeed in
equalising the marginal costs of abatement.

Attempts to reduce carbon emissions also affect the terms of trade. A global carbon tax might
substantially reduce the world price of carbon energy products. This would be highly advantageous
to those countries like Japan that import most of their oil. The OPEC countries and Australia, as a
major coal producer, would lose heavily and this might explain their hostility to such a tax. Another
important policy question is the extent to which unilateral measures or measures taken by a
combination of countries to reduce the emission of carbon dioxide might be offset by increases in
emissions from other countries. This might be caused either through the fall in world energy prices
or the relocation of energy intensive industry and subsequent importation of energy intensive
commodities. This phenomenon has been called „carbon leakage‟ and is an extension of the
Hecksher Ohlin trade theorem.

The optimal control of climate change involves choosing emissions in order to minimise the sum of
discounted abatement costs and damage costs over time. Leaving aside the question of international
cooperation the difficulty here is that such great uncertainties are involved, particularly regarding
the extent of avoided damage. It is nonetheless possible to compute the optimal control under
uncertainty. The objective function would be to minimise the expected sum of discounted abatement
costs and damage costs over time. The choice variables (i.e. the emissions limits) would need to be
given subscripts that refer not only by particular time periods but also to different states of the
world. Our ignorance regarding the true state of the world is reflected by the fact that we must
choose an emissions level which is identical across all states of the world.

The control strategy described above represent the case in which the uncertainty surrounding the
true state of the world is never resolved. But presumably in twenty years time much of the
uncertainty will have been resolved. Optimal control in the presence of learning can be modelled by
discarding with the constraint that the same abatement policy must be followed after the point at
which learning occurs. This corresponds to the fact that after we learn the true state of the world the
policies followed will be different for each state of the world.

As the preceding analysis makes clear, if we had information regarding the true state of the world
we could adjust our abatement policy accordingly rather than having to rely upon a policy intended
to deal with a range of possible outcomes. Since learning effectively removes a constraint from
optimisation problem the value of the objective function can only improve. How valuable might this
information prove to be and how much should we be prepared to pay for it? The expected value of
perfect information is defined as follows: it is the expected payoff obtainable if the true state of the
world is known prior to a policy having to be adopted minus the expected payoff obtained if the
policy decision has to be made before the true state of the world being known.

In 1992 at the Rio Earth Summit the Framework Convention on Climate Change was signed. The
ultimate aim of the Convention, which has been signed by 168 countries, is “...the stabilisation of
GHG concentrations in the atmosphere at a level which will prevent dangerous anthropogenic
interference with the climate. Such a level should be achieved within a time frame sufficient to
allow ecosystems to adapt naturally to climate change, to ensure that food production is not
threatened and to enable economic development to proceed in a sustainable manner.” Developed
countries were required to individually or jointly reduce GHG emissions back to 1990 levels by the
year 2000. Developed parties were further required to provide financial resources to meet the agreed
full incremental cost of implementing a range of measures in the Developing countries. However
the meaning of the term “full agreed incremental cost” was not defined and open to differing
interpretations. Developing countries were committed to nothing unless the Developed countries
actually pay for it.

In 1997 in Kyoto the Framework Convention on Climate Change was modified. Most developed
countries were required to make an 8 percent reduction on 1990 levels by between 2008 and 2012
with demonstrable progress by 2005. The US committed to a 7 percent reduction whilst the UK
committed to a 12.5 percent reduction. Denmark has committed to a 21 percent reduction whilst
Australia is by contrast allowed a 7 percent increase in emissions. These targets can be met through
trading emissions, through joint implementation and through the enhancement of natural sinks for
carbon such as the planting of forests although the rules are yet to be fully worked out. The main
problem with the treaty is that two major polluters, the Ukraine and Russia, are committed only to
stabilising their emissions at 1990 levels. Since they are currently 30 percent below 1990 levels this
means that they will be able to sell the rights for emissions that would otherwise never have
occurred (the so-called „Russian hot air‟). So far the US Senate has not ratified the treaty.

The UK Government intends to meet its targets partially through a levy on the industrial use of
energy – the so-called Climate-Change Levy. The Government has further announced its intention
to provide an 80 percent discount for those sectors that enter into negotiated agreements that set
“challenging targets”. These targets might be for energy efficiency or for carbon limits. Eligibility
for the discount is limited to those sectors exposed to international competition. Companies that
miss their targets are allowed to purchase compliance credits in order to make good their shortfall.

From January 2005 major emitters of carbon dioxide throughout the European Union will be
required to purchase tradable permits to cover their emissions. These permits will be allocated
through grandfathering. The EU emissions trading scheme is by a considerable margin the largest
such system in operation.

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