Pollution Control: Instruments

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Pollution Control Instruments
READING Common Chapter 5 Perman et al (2nd
edition) Chapters 12 and 13 Perman et al (3rd
edition) Chapters 7, 8 and 10.
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• Six ways of achieving an emissions target
• A quantitative regulation on output
• A quantitative regulation on inputs
• A quantitative regulation on technology used
• An emissions tax
• An emissions abatement subsidy
• A system of marketable permits

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The efficient level of pollution (M)
EMCM
PMNBM
Marginal damage caused by the pollution
M2
M1
M3
Pollution emissions, M
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An emissions tax as a pollution control
instrument The tax should be levied on units of
emissions, not units of output.
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A Special Situation. If there a constant
proportionality between output of the good or
service (Q) and pollutant emissions (M), then a
tax on emissions and a tax on output are
equivalent. Hence can use the following diagram,
in goods output space, to visualise matters
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Taxation of a negative externality
SMCPMCEMC
PMC
P2
P1
EMC
SMBD
Q
Q2 Q1
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But if the output-emissions ratio is variable
(which it will be in most cases), it is better to
think about this in terms of pollution (or,
better still, emissions).
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COST EFFICIENCY A cost-effective pollution
abatement programme is one that achieves any
desired pollution (or, equivalently, pollution
abatement) target at least cost. A necessary
condition for this least cost property is that
the marginal cost of abatement is equalised over
all abaters.
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With uniform taxation across discharge sources,
the overall reduction is achieved at least cost
PMNB1
PMNB2
a
b
t
t
P2
M1
M2t M2
M1t M1
PMNB is Marginal Net Private Benefit PMB
PMC No tax - Profit maximised where PMNB 0 With
tax Profit maximised where PMNB t Total Cost
of pollution reduction ?aM1M1t
?bM2M2t There is no re-allocation of pollution
reduction as between the two firms that can
reduce the total cost
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EMISSION ABATEMENT SUBSIDIES Emission abatement
subsidies can be used instead of
taxes. Subsidies can be thought of as negative
taxes. Taxes and subsidies have different
distributional effects. Short-term effects on
quantity of pollution attained are identical to
taxes. But long-run effects may differ (as they
affect industry profitability in different ways).
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There is a problem with emissions taxation (and
subsidies) if the firms PMNB functions are not
known, it is not possible to calculate the tax
rate that will bring about the desired overall
reduction in pollution. Whatever reduction is
achieved will be brought about at least cost, but
it could be too big or too small. Tradeable
permits avoid this problem. Since the quantity of
permits issued is equal to the desired level of
total emissions, assuming compliance, the
achieved reduction is that intended. Tradeable
permits are dependable, as well as least cost.
They have the least cost property because with a
single market price per permit, all firms move to
where their PMNB permit price, and the
situation is as in the previous slide. If the
permits are initially issued free, there is no
revenue arising, as there is with taxation.
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The Market for Emissions Permits (Permits sold in
a competitive auction)
Total quantity of permits issued (sold)
P
Demand for permits
M
M
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The Market for Emissions Permits (After permits
have been issued at zero price)
Supply of permits
P
Demand for permits
M
Quantity of permits exchanged
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Tradable permits in practice Where the pollutant
is a stock pollutant, damage depends on location
of emissions (and possibly on timing too).. it
is then not efficient, nor reliable, to have
freely-tradable permits based solely on emission
quantities. More complex trading arrangements
required. But the information requirements to
implement these can be very high.
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The efficient level of pollution abatement (Z).
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The privately efficient level of pollution
abatement (Z)
MCZ
PMNBZ
Pollution abatement, Z
0 Privately optimal abatement
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The socially efficient level of pollution
abatement (Z)
MCZ
SMNBZ
Pollution abatement, Z
Z2
0
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An emissions tax can attain the socially
efficient level of pollution abatement (Z)
MCZ
t
tax rate
Pollution abatement, Z
Z2
0
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An abatement subsidy can attain the socially
efficient level of pollution abatement (Z)
MCZ
SMNBZ
Subsidy rate
S
Pollution abatement, Z
Z2
0
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An abatement subsidy can attain the socially
efficient level of pollution abatement (Z)
MCZ
Subsidy rate
S
Pollution abatement, Z
Z2
0
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An emissions tax can attain the socially
efficient level of pollution abatement (Z)
MCZ
SMNBZ
t
tax rate
Pollution abatement, Z
Z2
0
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Who bears the cost of pollution control?
P
S2
t
S1
P2
P1
P3
t
D
Q
Q1
Q2
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• Is pollution control necessarily bad for
  business?
• It may promote technological innovation that
  reduces costs
• Reputation effects
• Niche marketing environmentally concerned
  customers
• First mover effects international trade
• Environmental tax revenues can be used to reduce
  other taxes on business