Part III. Exhaustible Resources

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Part III. Exhaustible Resources

• Ozone
• Energy

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B. Energy

• Part 2 Chapter 9

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Introduction

• The focus of Chapter 9 is on the impact of energy
  use on the environment, with a particular focus
  on air pollution and acid rain.
• Although all types of energy have some type of
  environmental impact, fossil fuels are
  responsible for the majority of the negative
  impacts of energy use.

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Air pollution

• Perhaps the greatest negative interaction between
  energy and the environment occurs with air
  pollution, where the combustion of fossil fuels
  is the major source of the air pollutants that
  were initially regulated by the 1972 Clean Air
  Act, with amendments in 1977 and 1990.
• These pollutants include particulates, sulfur
  oxides (SOx), nitrogen oxides (NOx), carbon
  monoxide (CO), volatile organic compounds (VOCs),
  and lead (Pb).

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Air pollution

• Most of these pollutants have ? since the passage
  of the Clean Air Act, except for nitrogen oxides.
• Nitrogen oxides have ? because of the ?emissions
  from on-road (cars, trucks) and off-road vehicles
  (bulldozers, cranes) and off-road engines (boat
  engines, lawnmowers).

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Air pollution

• In addition to fuel consumption, the use of
  energy is responsible for virtually all the
  pollutants in the transportation sector and a
  good portion of the emissions in industrial
  processes.
• Despite ? in overall emission levels in the US,
  approximately 98 million people live in
  nonattainment areas (locations which
  persistently fail to meet national ambient air
  quality standards).
• See Box 9.1 for benefits and costs of Clean Air
  Act

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Stationary sources Clean Air Act

• Stationary sources of criteria air pollutants
  (smokestacks from factories and buildings) are
  regulated under the Clean Air Act of 1972 and its
  amendments (1977 and 1990).
• Using federal govt established national ambient
  standards on concentration of each pollutant,
  states implemented C C policies to reduce
  emissions.
• These C C policies did not allow firms to seek
  cost-minimizing alternatives in production.

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Command and control

• Smokestack by smokestack control
• A firm that could reduce its abatement costs by
  switching production from 1 facility to another
  could not do so if pollution from 1 smokestack ?
  (even if total pollution from firm ?)
• Regulations did not allow firms to meet
  environmental goals within own facilities

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Bubbles

• The Pollution Bubble concept was a modification
  of the C C regulations which treated each firm
  as if a glass bubble encased the entire firm's
  operations.
• Firms could make adjustments within the bubble as
  long as the pollution that left the bubble
  conformed to emissions limitations.
• While allowing some flexibility to respond to
  pollution standards, even modified the policy was
  not effective in reducing pollution.

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Offsets

• Modification to the Clean Air Act allowed new
  emission sources if they induced existing
  polluters to reduce pollution by 150 of the
  amount generated by the new source.
• This offset system allowed development but
  limited trade to new firms and was not as
  efficient a policy as marketable permits.
• Efficiency calls for trade among all polluters.

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Acid Rain

• Acid deposition process by which certain types
  of pollutants chemically transform into acidic
  substances in the atmosphere and then fall to the
  earth.
• Forms of precipitation include acid rain, acid
  snow, and acid fog.
• While acid rain has received a lot of press,
  there is considerable uncertainty about the
  actual damages generated by the emissions of acid
  deposition precursors.
• Precursor pollutants are those pollutants that
  are chemically transformed to generate the
  substances that actually cause the environmental
  damage.

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Acid Rain

• Acid rain belongs to a category of pollutants
  referred to as regional pollutants, which have
  effects over more than just the vicinity of their
  emission.
• Unlike global pollutants, location of emissions
  is important with regional pollutants. Effects
  felt primarily downwind of emissions.
• Acid deposition problems often manifest as
  transboundary (transfrontier) pollutants.

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Transboundary pollutants

• Emitted in 1 country then transported to another
  country
• 2 examples include
• Sulfur dioxide emissions in the United States
  which affect environmental quality in Canada and
  vice versa.
• Pollution generated in Great Britain and German
  which causes acid deposition in Scandinavia.

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What Causes Acid Deposition?

• The most important precursor pollutants in the
  acid deposition problem are sulfur dioxide (SO2)
  and nitrous oxides (NOx).
• SO2 burning of coal and oil as boiler fuel.
• NOx automobile emissions.
• Acid rain, other forms of acid deposition are
  caused when SO2 and NOx form sulfate and nitrate
  in the atmosphere, which then combines with
  hydrogen ions to form acids.
• Sulfate and nitrate molecules are formed when SO2
  and NOx combine with oxidants in the atmosphere.

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Chemical relationships

• Tropospheric ozone (03) is an important oxidant
  which is formed when 2 pollutants, NOx and
  volatile organic compounds (VOCs) chemically
  interact in the presence of sunlight.
• The presence of VOCs in the atmosphere, while not
  directly responsible for acid deposition, leads
  to greater proportions of SO2 being converted to
  sulfate and NOx being converted to nitrate.
• Complete list of anthropogenic sources of SO2,
  NOx, and VOCs emissions and trends in emission
  levels in the Appendix

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Chemical relationships

• The nature of the chemical relationships requires
  a coordinated effort at reduction of the
  differing pollutants.
• A ? in NOx not only directly ? acid rain, but
  indirectly ? the conversion of SO2 by ? ozone.
• The interactions among these pollutants make the
  identification of the optimal level of pollution
  an extremely difficult problem.
• The marginal damage function for SO2 depends not
  only on itself but also on the level of NOx and
  VOCs.

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Optimal level SO2

• Even if the MAC function was known, one could not
  determine the optimal level of SO2 emissions
  without also knowing the costs of ? nitrous oxide
  and VOCs, which in turn could shift the MDF.
• The process of identifying the optimal level of
  SO2 (or NOx or VOCs) can be even more complex if
  the MAC of 1 pollutant is a function of the
  abatement level of other pollutants.
• Changes in a production process that ? energy
  efficiency could ? the level of all pollutants,
  while some abatement devices, scrubbers for
  example, result in a ? in one type of pollutant
  and an ? in another.

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• As Figure 9.2 indicates the optimal level of a
  pollutant becomes a moving target.

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Optimal level SO2, NOx, VOCs

• Since the optimal level of each of the 3
  pollutants cannot be determined independently of
  each other, the level of emissions of each must
  be chosen to minimize the sum of the total
  abatement costs total damages associated with
  all 3 pollutants.
• Requires what?
• That the marginal damages of each pollutant
  marginal abatement costs of each pollutant.

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• Eq. 9.1 represents the situation where total
  abatement costs (TAC) are a function of the level
  of emissions of all 3 pollutants (El,E2,E3).
• Eq. 9.2 represents total damages (TD) as a
  function of all 3 pollutants.
• Equations 9.3 9.5 must be solved simultaneously
  to determine the optimal output level of each
  pollutant.

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Consequences of Acid Deposition

• Acid deposition and related pollutants have many
  significant impacts on natural systems and human
  systems.
• These include acidification of surface water and
  detrimental effects on high elevation coniferous
  forests.
• SO2, sulfate particles, and acid aerosols are all
  suspected of having detrimental effects on human
  health.

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Consequences of Acid Deposition

• Ozone, caused by the emission of NOx, has harmful
  effects on both vegetation and humans.
• The particles that generate acid deposition also
  serve to scatter light, creating a pollution
  haze and reducing visibility.
• Leads to the premature weathering and degradation
  of materials used in buildings, monuments,
  fences, and other structures.

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Pre-1990 Acid Deposition Policy

• The pre-1990 Acid Deposition Policy focused
  primarily on the establishment of cause and
  effect relationships.
• Because of large scientific uncertainty assoc.
  with acid dep., Reagan administration's policy
  required that more information be developed
  before implementing any reductions in emissions
  of SO2 and NOx.
• Insufficient evidence of cause and effect
• But, SO2 and NOx are criteria pollutants that
  are regulated under the 1972 Clean Air Act and
  the 1977 Clean Air Act Amendments.

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Local effects

• Only focused on local effects of SO2 and NOx
• The fact that these regulations focus on local
  effects of emissions may have exacerbated the
  problem.
• One way in which a local polluter can minimize
  the local effect of pollution emissions is to
  build a tall smokestack which injects pollutants
  into higher wind currents which carry these
  pollutants into other areas.
• These tall smokestacks were, to a large extent,
  responsible for the sulfur component of the acid
  deposition problem.

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Who should pay?

• Important component to acid deposition policy
  who pays for environmental improvement (regional
  nature)
• Political problems associated with developing
  legislation benefiting 1 region at expense of
  another
• Creation of the 1990 Clean Air Act Amendments
  (CAAA) packaged several environmental problems
  within the same pieces of legislation address
  the acid rain, ozone and carbon monoxide,
  pollution from cars and trucks, air toxins, and
  stratospheric and global climate protection.

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Acid Deposition Policy and the 1990 Clean Air Act

• Acid deposition is dealt with in Title IV of the
  1990 CAAA, which specifies a 10 million ton ? in
  annual SO2 emissions to be achieved by the year
  2000.
• An interesting aspect of Title IV of the 1990
  CAAA is that it represents the first attempt by
  the federal government to implement a system of
  marketable pollution permits.

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MPPs the 1990 Clean Air Act

• Economists applauded the incorporation of
  marketable permits as an important step in
  improving the efficiency of environmental
  regulations.
• The primary criticism against the permits was
  that there is no attempt to make geographic
  distinctions associated with the location of
  emission of SO2.
• The 1st trade to occur was between a Wisconsin
  utility and the Tennessee Valley Authority (TVA).

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MPPs the 1990 Clean Air Act

• The sale of allowances from Wisconsin to
  Tennessee resulted in less pollution by the
  Wisconsin utility and more by TVA.
• The cost of ? pollution by the amount of the
  traded allowances must be lt the price of the
  allowances, or the Wisconsin utility would not
  have agreed to the sale.
• Similarly, the savings in the abatement costs for
  TVA must be gt the cost of the permits.
• Both companies gained, and total cost ?

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Regulations on Mobile Sources of Pollution

• The primary regulation on mobile sources of
  pollution is specifying abatement control devices
  for vehicles.
• All automobiles are required to employ a
  catalytic converter.
• Platinum in the converter serves as a catalyst
  that lowers the ignition temperature of many of
  the unburned hydrocarbons and other pollutants in
  gasoline.

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Regulations on Mobile Sources of Pollution

• Problem with this C C regulation is that it
  controls all areas of the country in the same
  fashion, regardless of impact of an additional
  units of emission.
• Additionally, it does not provide incentives to
  reduce pollution by driving less, maintaining
  their cars, or choosing an alternative vehicle or
  mode of transportation.

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Regulations on Mobile Sources of Pollution

• Air pollution from automobiles is also indirectly
  controlled by Corporate Automobile Fuel
  Efficiency (CAFE) standards, which specify the
  average miles per gallon that must be achieved by
  each automobile manufactured, where a higher MPG
  means less gasoline burned per mile which means
  less emission.
• This standard does not reduce the number of miles
  driven and may actually induce greater mileage
  (more efficient cars cheaper to drive).

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Regulations on Mobile Sources of Pollution

• Mills and White (1978) suggest alternative policy
  which would tax cars based on the total amount of
  pollution that they generate each year.
• An annual diagnostic test would determine the
  emissions/mile and this multiplied by the
  odometer reading would give annual emissions.
• A combination of federal, state taxes could be
  used to account for regional difference in
  ambient air quality.
• This would create incentives to drive less, live
  closer to work, and develop lower polluting
  automobiles.

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Energy Policy and the Environment

• US Presidential Administrations have integrated
  environmental policy and energy policies usually
  with 2 major goals
• Increase domestic supplies of energy and reduce
  dependence on foreign oil.
• Promote a cleaner environment by requiring energy
  users to utilize cleaner technologies.
• These policies have had a mixed record of
  success.

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True social cost of energy

• One dominant factor in the failure of US
  energy/environmental policy is that it fails to
  allow the cost of energy, particularly imported
  petroleum, to reflect its true social cost.
• This cost has 2 components
• The social cost of dependence on insecure imports
  of petroleum.
• The environmental cost of energy use.

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True social cost of energy

• Energy policy has traditionally been designed to
  keep energy costs low.
• A higher cost associated with energy use would
  result in
• the development of alternatives to fossil fuels
• ? in the amount of pollution per unit of energy
  used
• ? in energy use
• the development of more energy efficient
  technologies
• ? in oil imports

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True social cost of energy

• There is a fundamental disparity between the
  private cost of energy use and the social costs
  associated with its use.
• There are a variety of ways to eliminate this
  disparity.
• The least costly would be a comprehensive series
  of MPPs or a system of per unit pollution taxes
  (incentives)

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To eliminate disparity

• A combination of both permits for large
  stationary polluters taxes for mobile/small
  stationary sources may be best (transactions
  costs too high for small sources to enter permit
  system).
• Externalities in the production of energy could
  be addressed with liability and bonding systems
  (oil spills, risky projects)

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Fuel taxes

• To implement MPP or emission tax system, need
  good monitoring often difficult
• Fuel taxes may be a 2nd best solution to
  pollution taxes or permits.
• A tax added to the price of fuel based on the
  average amount of pollution of the fuel would
  provide an incentive to burn less fuel and
  encourage energy efficiency.
• For example, the per BTU unit tax on coal gt oil gt
  natural gas

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Lack of progress

• The importance of increasing the price of fuel
  can be seen both in pollution problems arising
  from energy use and the lack of progress in
  developing alternative energy sources.
• Alternative sources of energy include solar
  power, geothermal power, wind power, and liquid
  fuel from renewable sources such as ethanol and
  methanol from a variety of plant sources.

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Lack of progress

• While alternative sources of energy are generally
  less polluting than fossil fuels, alternative
  energy technologies are more expensive for energy
  users than coal or oil, so they have not become
  established as important sources of energy.
• Alternative fuels and energy technologies would
  be significantly advanced if the price of fossil
  fuels rose to incorporate the full social cost of
  these fuels as illustrated in Figure 9.6.

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Market solution vs. social optimum

• The MPC curve for all fuels is constructed by
  horizontally summing the MPC curve for
  alternative fuels and the MPC curve for oil.
• The market equilibrium is tl where total fuel MPC
  market demand curve.
• The social optimum, t2 occurs at a lower output
  where total MSC market demand.

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Market solution vs. social optimum

• If MPC oil was ? through tax, then MPC for oil
  could ? to be MSC oil, generating market
  equilibrium t2
• This solution associated with higher price (p2),
  and oil use declines from o1 to o2, alternatives
  increase from a1 to a2.
• At this lower output level, oil usage ? and
  alternative fuel use ?.

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The Macroeconomic Impact of Fuel Taxes

• Are low energy prices a requirement for U.S.
  economic success?
• Table 9.3 lists gasoline prices in US dollars
  (current, not inflation adjusted) per liter for
  selected developed countries.
• It is clear that other economies with higher
  energy prices (based on higher taxes) have strong
  and growing economies.

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The Macroeconomic Impact of Fuel Taxes

• One of the reasons for the undesirable
  macroeconomic impact of high prices in the 1970s
  was the fact that the price change was so sudden.
• This suggests that implementing increased gas
  taxes over time will not hurt the economy and
  will allow consumers and producers to incorporate
  the higher prices into their future plans.

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The Macroeconomic Impact of Fuel Taxes

• If taxes are efficiently utilized, the tax
  revenue generated could be used to reduce taxes
  in other areas of the economy, for example,
  income taxes.
• This reduction in income taxes could lead to
  greater productivity which would offset, at least
  partially, the negative impact of fuel taxes.
• A pollution tax, system of MPPs, or fuel taxes
  will cause less of a negative impact on the
  macroeconomy than a corresponding increase in the
  prices from OPEC monopoly power.

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Transition Fuels and the Future of Fuels

• Many people believe that sometime in the future
  there will be radically different sources of
  energy.
• The question is How do we get from the present
  time to the time when these innovations in energy
  are available, or what should be our transition
  fuel?
• The mechanism which will move the economy from
  one fuel to another is rising prices in the
  market.

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Transition Fuels and the Future of Fuels

• Assume 3 possible fuels oil, coal, solar
• Oil, coal ? MEC, solar HIGH constant MEC
• Oil used first (cheapest)
• As the MEC of oil ? relative to the MEC of coal,
  the opportunity cost (marginal user cost) of
  using oil ?.
• The transition point to a new fuel is when total
  marginal cost of oil (MECMUC) is equal to total
  marginal cost of coal.

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Figure. 9.7. - Fuel Transition
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Transition Fuels and the Future of Fuels

• Policy makers have been concerned with managing
  the transition from 1 source to another.
• One concern is that the market will not
  adequately spur research and development into new
  technologies.
• Another is the continued policy of abundant,
  cheap energy at a low price.
• A more recent concern is that if environmental
  externalities are not reflected in the market
  price, then transition to cleaner fuels will
  occur later than socially optimal.

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Transition Fuels

• The Carter administration adopted a policy that
  defined coal as a transition fuel but concerns
  about high levels of pollution from burning coal
  changed this choice.
• Viewed as the cleanest of fossil fuels, another
  possibility is deep natural gas, which is 1000s
  of feet deeper and more expensive than
  conventional gas.
• However, if all fuels included all social costs
  in their prices, then the market would pick the
  fuel with the lowest social cost as the
  transition fuel.

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Energy and the Third World

• The real energy crisis is in the Third World
  nations, where the economies are much less
  capable of adjusting to price shocks associated
  with oil price increases.
• Often Third World countries have to use much
  needed foreign reserves to purchase oil which
  leads to borrowing for development projects.
• The ? in the price of fossil fuels has forced a
  greater reliance on fuel wood which has
  contributed to a growing rate of deforestation.
• Environmental externalities from energy use have
  also contributed to poor environmental quality.

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Summary

• Although the Clean Air Act and other legislation
  in the US has had some impact in reducing the
  negative consequences of energy use, much
  progress needs to be made.
• Internalizing the external cost of emissions and
  national security externalities through permits
  and taxes will generate a series of reactions
  which lead to higher social welfare.