Session 6: Public Policy Instruments

1. Session 6: Public Policy Instruments Command and Control Strategies

2. Learning Objectives At the end of this session, you should be able to • Appreciate the complexity of applying standards as a tool in improving environmental quality • Understand the differences between the three major types of standards • Evaluate the issues underlying the application of standards in relation to the levels at which they should be set, whether they should be uniform or not and their incentive effects • Discuss the issues in relation to enforcement of standards

3. Clean Air • https://www.youtube.com/watch?v=Ntchus_99Rg

4. Command and Control Polices • Relies on Standards • Mandated level of performance that is enforced by law • Types of Standards • Ambient Standards • Emission Standards • Technology Standards

5. Theoretical Impact of Standards • Fig 1 • Assume that the actual rate of emissions – e1 • Gov. introduces a standard set at e* as maximum level of emissions • Cost to firm = area a = compliance costs € MD MAC a e* e1 Emissions

6. The EU National Emissions Directive 2008 • Sets a maximum limit on sulphur dioxide concentrations • Ambient standards are normally expressed in terms of average concentration levels • Limits on sulphur dioxide are set at 125µg/m3 (micrograms per cubic meter) on a 24 hour basis and not to be exceeded more than 3 times a yr and a 350 µg/m3 on an hourly basis and not to be exceeded more than 24 times a year.

7. The Economics of Standards • Three Questions • What is the appropriate level at which the standard should be set? • Should the standard be applied uniformly? • What are the incentive effects of standards?

8. What is the appropriate level to set the standard? Should you take into account marginal damages and marginal abatement costs? • Zero-Risk level • ‘Reasonable level’ • Efficient Emission level • Strict Standards ----’Technology Forcing’

9. At what level do you set standards? • Fig 2 • e2= threshold level • e* = efficient level • e3= reasonable level € MD MAC a e2 e* e3 e1 Emissions

10. Should Standards be applied uniformly? • The efficient level of pollution can vary for many reasons ( for eg geographic areas, meteorological conditions; specific time period etc) • Setting a single standard may not be efficient • See fig 3

11. Should Standards be applied uniformly? • Fig 3 • eu= efficient level of emissions for urban area • er = efficient level of emissions for rural area • Setting one standard not efficient MDu € MDr MAC a e2 eu er e1 Emissions

12. Problem with standards: Equi Marginal Principle • Authorities set standards according to equi-proportionate method rather than the equi- marginal principle • Equal standards approach will produce less reduction in total emissions than would be achieved under equi-marginal principle • Govs do not have knowledge of MAC curves of polluters

13. What are the incentive effects of standards? • How do standards affect the incentives of firms? • Key Question: Does the policy create incentives for sources to reduce emissions in cost effective ways? • Two Scenarios • Short-Run • Long-Run

14. Short Run • Standards are an all or nothing approach • No incentives for firms to do better • Take away decision flexibility from producers (ie technology standards)

15. Incentives in the Long Run • Do standards provide incentives for innovation (managerial or technical) which make it less costly to reduce emissions? • WRT technology standards: NO (Why not?) • Wrt Emission standards: Yes • See fig 4

16. Emission Standards: Short Run and Long Run Incentives • Fig 4 • Firm in 2 situations • MAC1 – represents abatement costs in SR • MAC 2- represents abatement costs in LR • If emission standard is set at e2, compliance =a +b for MAC1 • If emission standard set at e2, compliance = b for MAC2 • a = r& d incentive € MAC1 MD MAC2 a b e1 e2 Emissions

17. Enforcement • Enforcement of standards takes resources • Penalties are not often sufficient • Trade-off between resources used in enforcement and benefits of greater compliance • Should standards be set with enforcement costs in mind? • Size of sanction for non-compliance • See fig 5

18. The Economics of Enforcement • Fig 5 • C1 & C2 are curves that combine MAC and marginal enforcement costs • Correspond to different technologies of enforcement • Origin at e0 (why?) • At C1: Total costs equal to enforcement costs (a +b) and abatement costs (c +d) • What are the total costs at C2? MD € C1 C2 MAC a e b f c d eo e2 e1 Emissions

19. Enforcement Costs • Should standards be set with enforcement costs in mind? • What should the size of the sanction for breaching standards be set at? • Should authorities set less or more strict standards? Why or why not?

20. Summary • Standards are the most popular method of pollution control • There are three primary types of standards (ambient, emissions and technology) • Important questions are 1) what level to set the standards at ?2) Should standards be uniform? and 3) what are the incentive effects of standards? • Enforcement including available sanctions are an important issue • Standards are very complex tools when applied to environmental policy

21. Required Reading • Field & Field (chapter 11)