The Economics of Environmental Regulations

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The Economics of Environmental Regulations

• Pollution Tax and Markets for Transferable
  Pollution Permits

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Effluent Charge

• An Effluent Charge is a tax or a financial
  penalty imposed on polluters by government
  authorities. The charge is specified on the
  basis of dollars or cents per unit of effluent
  emitted into an ambient environment. Example, a
  carbon tax (per ton of carbon emitted) to address
  the concern for global warming.

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The Analytic of Effluent Charge

• How does effluent charge work? Show this using
  Figure 6.1 (see the handout).

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Principal Advantages of Effluent Charges

• In principle, they are relatively easy to
  administer.
• They are generally cost-effective, but not
  necessarily socially optimal.
• They generate revenues while correcting price
  distortions--the double dividend feature of
  effluent charges.
• They tend to provide firms with incentives to
  invest in pollution control technology.

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Main Disadvantages of the Effluent Charges

• Monitoring and enforcement costs could be high
  (i.e., high transaction costs)
• They could have a disproportionate effect on
  income distribution
• They do not condemn the act of polluting on
  purely moral grounds. It is okay to pollute,
  provided on pays for it.

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• Firms are philosophically against taxes of any
  form, especially when they are perceived to cause
  increased prices and an uncertain business
  environment.
• Environmental organizations generally oppose
  effluent charges for both practical and
  philosophical reasons. Pollution taxes are
  licenses to pollute. Taxes are generally
  difficult to tighten once implemented.

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Transferable Emission Permits

• Essentially, the main idea behind transferable
  emission permits is to create a market for
  pollution rights. A pollution right simply
  signifies a permit which consists of a unit
  (pound, ton, etc.) of a specific pollutant.

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• In general, the system of transferable permit
  operate on the basis of the following basic
  postulates
• it is possible to obtain legally sanctioned right
  to pollute
• These rights (permits) are clearly defined

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• The total number of permits and the initial
  distribution of the total permits among the
  various polluters are assigned by government
  agencies. In addition, polluters emitting in
  excess of their allowances are subject to a stiff
  monetary penalty
• Pollution permits are freely transferable. That
  is, they can be freely traded in the marketplace.

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Transferable Pollution Permits in Theory

• Show how transferable permits work in theory
  using the figure in the handout--Figure 6.4

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Principal Advantages of emission Permits

• they are least interventionist
• they are are cost-effective, especially when the
  number of parties involved in the exchange of
  permits is large
• they provide observable prices for environmental
  services
• they can be applied to a wide range of
  environmental problems

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Principal disadvantages of transferable emission
permits

• The mechanisms used to distribute permits among
  potential users could have significant equity
  implications.
• The idea of permits to pollute conveys, to some,
  a reprehensible moral and ethical value.
• The applicability is questionable for pollution
  problems with an international scope.

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• They are ineffective when there are not enough
  participants to make the market function.
• Permits can be accumulated by firms for the
  purpose of deterring entrants or by environmental
  groups for the purpose of attaining the groups
  environmental objectives.

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The Macroeconomic Effects of Environmental
Regulations

• Policies used to internalize environmental
  externalities could have economic-wide effects.
• These effects are suspected to appears in the
  forms of general price increase (inflation) or
  unemployment. show how this would be the case
  using a simple demand and supply analysis

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• Despite this, at the aggregate level, the effects
  of environmental regulation on price and
  unemployment are not that clear cut for the
  following reasons
• The economy-wide effect of environmental
  regulation on unemployment is unclear since a
  decrease in employment in certain sector of an
  economy could be offset by a gain in other
  sectors.

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• Furthermore, some even claim that cleaning up the
  environment creates more jobs than it
  destroys--since firms associated with pollution
  control activities tend to be relatively more
  labor intensive.
• In addition, some economists argued that strictly
  enforced environmental policy could have the
  effect of forcing firms to adopt more efficient
  production technology--the Porter Hypothesis.

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• On the other hand, it was argued that
  environmental regulations have negative effects
  on productivity (hence, aggregate output and
  unemployment ) for the following two reasons
• Pollution control expenditures displace
  investment in new plant and equipment, and
  require firms to use some inputs for compliance,
  hence adversely affecting the rate of increase in
  labor productivity.

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• Furthermore, regulation is believed to increase
  the uncertainty climate of private industry,
  hence adversely affecting the level of
  industry-wide investment.

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• At least in theory, the inflationary effect of
  environmental regulation seems to be
  indisputable. This is because environmental
  policy forces society to take into account costs
  that would have otherwise been neglected.
• However, several empirical evidence suggests that
  the price effect of environmental regulation is
  very minimal at the aggregate level.