CEEPA Cape Town May 2006 Policy Instruments for Pollution control and resource management

1. CEEPA Cape Town May 2006Policy Instruments for Pollution control and resource management Thomas Sterner Sterner Environmental Policy Making

2. Environmental Economics Unit • The EEU is a research andteaching unit of Göteborg University. The unit has a dozen PhDs and 25 graduate students working on natural resources andenvironmental economics. • EEU specializes in environmental economics research and training. The researchis focused on natural resource management in developing countries, the choice ofpolicy instruments for transport, industrial environmental problems and welfarerelated issues. Sterner Environmental Policy Making

3. EEU in the winter Sterner Environmental Policy Making

4. Capacity Building in Developing Countries Sterner Environmental Policy Making

5. Welfare Economics (Sept –Oct, 2004) • Environmental Valuation (Oct 2004) • Natural Resource Economics (spring 2005) • Environmental Economics and Policy Making • Systems Ecology Graduate Courses Sterner Environmental Policy Making

6. Thomas Sterner 1986 Ammon Mbelle 1988 Ruben Tansini 1989 Mikael Franzén 1994 Olof Johansson 1996 Jorge Rogat 1998 Mohammed Belhaj 1998 Alemu Mekonnen 1998 Gunnar Köhlin 1998 Fredrik Carlsson 1999 Tekie Alemu 1999 Lena Höglund 2000 Adolf Mkenda 2001 Henrik Hammar 2001 Håkan Eggert 2001 Lena Nerhagen 2001 Martin Linde-Rahr 2002 Francisco Alpizar 2002 Åsa Löfgren 2003 Susanna Lundström 2003 Edwin Muchapondwa 2003 Hala Abou-Ali 2003 Jessica Andersson 2004 Mahmud Yesuf 2004 Eseza Kateregga 2005 Graduated PhD’s Sterner Environmental Policy Making

7. Master in Environmental Science Sterner Environmental Policy Making

8. Published by RFF & World Bank. • The need for policy • The menu of instruments • Theory of Instrument selection and design • Application to Transport • Application to industry • Application to natural resources Covers both US, Europe, other OECD, developing and transitional countries Sterner Environmental Policy Making

9. Policy Instruments RIGHTS REGULATION INFO/LEGAL Property rights Technological Standard Publicparticipation Taxes Subsidy (Reduct.) Tradablepermits Performance Standard Information disclosure Charge, Fee/Tariff Tradable Quotas Ban Voluntary Agreement Certificate Deposit-refund Permit Liability CPR Zoning Refunded Charge PRICE-TYPE Sterner Environmental Policy Making

10. Criteria • Effectiveness • Static Efficiency • Dynamic Efficiency • Fairness (Distribution of costs/benefits) • Incentive compatibility • Political feasability • Instrument costs and information needs Sterner Environmental Policy Making

11. Conditions (Ecol. or economic) • Heterogeneity in abatement costs • Heterogeneity in damage • Uncertainty/Risk • Asymmetric information • Monopoly or oligopoly • Synergies or ecological thresholds • Non-point pollution Sterner Environmental Policy Making

12. Property Rights are Fundamental • Property is a bundle of rights: Access, productive use, management, exclusion, lease, sale, destruction. Extent varies. • ”Real” Property from King Feudalism • Enclosure and Common Property Sterner Environmental Policy Making

13. Property Rights II • Who has rights to water, air, ecosystems: • Land owner, State, First user, citizens. • Water rights: Riparian or Prior Appropriation • The rights of the tiller …and of squatters • The Coasian Perspective • Market Failures: Externalities, Public goods Sterner Environmental Policy Making

14. Payoff to worker Potential Harvest 1 Pure Land rental 2 Share cropping 3 Wage with bonus 4 Pure wage Harvest is f(Weather) Ass Info + Risk  Wage  MP Sterner Environmental Policy Making

15. Moral Hazard/Adverse Selectíon • The very poor are very risk averse • They would need savings or insurance • Banks not available due to transaction costs and lack of collateral (tenure issues) • Insurance not available: Moral Hazard + Adverse Selection •  Inequitable contracts and • Unsustainable use of resources Sterner Environmental Policy Making

16. Lack of markets for saving (banks) leads to other saving forms. Cattle are one such form that can be counterprod as more cattle  overgrazing Don’t tax cows. Provide banks! Lack of insurance may make farmers very risk averse. Risk of pests (locust) unacceptable even if average damage small. Don’t provide pesticide spray. Provide insurance! Risk and environmental management Sterner Environmental Policy Making

17. Insurance Pesticides The important role of financial institutions Sterner Environmental Policy Making

18. Cost savings due to equal MC • Equal abatement • Efficient abatement Sterner Environmental Policy Making

19. Heterogeneity Saving by MBI 1 0 1.5 4% 2 ~11% 4 36% 9 64% 99 ~96% Heterogeneous MC (2) • When are costs heterogeneous?? • If Abatement takes time • If firms with different scale or different business emit same pollutant Sterner Environmental Policy Making

20. Heterogenous Damage • MBI less relevant: The idea of equalizing MC makes no sense with hot spots • Zoning is an appropriate instrument • Similarly the creation of natural reserves • However note that MBIs can be made to vary geographically (and temporally) Sterner Environmental Policy Making

21. What is a permit Sterner Environmental Policy Making

22. Different types of Permit • The original add-on to regulation: Make regulations into rights and then let people trade in over-fullfilment (Emission Reduction Credits). • Cap and Trade. Decide a maximum (CAP) for pollution and then let the market work on its own. Less transaction costs. • Ambien permits, certificate schemes etc Sterner Environmental Policy Making

23. Allocation of permits • Permits can be allocated in proportion to: • Historical pollution: Grandfathering • (Historical/)current production: Output allocation or benchmarking. • Equally • By WTP ie through an auction • NB Duration, bankability, updating… Sterner Environmental Policy Making

24. Properties of Permits • L = pqi – ci(qi ,a i) + Pe(êi0 - ei(qi ,a i)) • Kuhn-Tucker conditions are: • c’a = - Pe e’aMC Abatement is optimal • P = c’q + Pe e’q Output price is optimal • If number of permits is related to output then second condition does not hold Sterner Environmental Policy Making

25. Weitzman P vs Q If there is uncertainty concerning the marginal cost of abatement and • The Marginal Damage of pollution is very steep (thresholds)USE QUANTITY-type instrument. • The Marginal costs are thought to be steeper (for instance due to risk of bankrupcy) while damage is flat (eg stock pollutants) then USE PRICE-type instruments. Sterner Environmental Policy Making

26. Some other rules of Instrument selection and design 1 • If abatement possibilities are limited then a higher product price caused by a tax will lower consumption to a socially optimal level. This OUTPUT effect is very desirable. Except in a number of cases such as small open economies where the products will just be imported • Also with monopolies: taxes are perverse because monopolies alreay have too high prices and too low output. Sterner Environmental Policy Making

27. Some other rules of Instrument selection and design 2 • For some persistent pollutants (often related to energy/transport) tax revenues might be substantial. In this case the revenue-recycling effect of the tax implies other taxes can be lowered which decreases the cost of the instrument. This effect is lost if regulation or (free) permits are used. Sterner Environmental Policy Making

28. Some other rules of Instrument selection and design 3 • Subsidies work roughly like taxes • But have perverse output effect  encourage entry (delay exit from) industry • Reduction of Perverse subsidies important • Deposit Refund schemes superior to taxes when monitoring of pollution is expensive • Fines or liability also important complement Sterner Environmental Policy Making

29. Assume marginal cost for each vehicle increases with vehicle flow c(V) Total cost for traffic V C(V) = V*c(V) + e(V) Average private cost for V vehicles = V*c(V)/V = c(V) Marginal social cost = C’ = c(V) + Vc’ + e’ NB that both c’ and e’ increase strongly with increasing flow V The Economics of Congestion Sterner Environmental Policy Making

30. The Economics of Congestion Marginal Social Cost $ Private marginal cost = Average Social Cost Aggregate Welfare Benefits of a tax Demand V* Vu Sterner Environmental Policy Making

31. Congestion and Pollution TOTAL Marginal Social Cost including environmental costs = c + V c’ + e’ m $ Marginal Social Cost (incl congestion) = c + V c’ Demand h g Marginal Private Cost = Average Social Cost = c k d e c f a b Vehicles/hour (Traffic Flow) V* Vu Sterner Environmental Policy Making

32. Benefit to society of regulation is avoided welfare loss hem but note DISTRIBUTION BENEFITS: Victims of Pollution gain fkmh State gains Tax revenue abhg COSTS Motorists who continue driving gain time but pay tax abdc-abhg = Loss of -cdhg Motorists who stop driving lose CS –beh The DISTRIBUTION of costs and benefits Sterner Environmental Policy Making

33. Vintage VOC Nox Pm 1988 2,5 1,53 37 2000 0,46 0,17 7 2010 0,08 0,04 1,2 Special Environmental Considerations • Emissions depend very strongly on technology! Sterner Environmental Policy Making

34. And other factors like temperature, population density All figures g/km Sterner Environmental Policy Making

35. Estimates of environmental costs • 1988 car: • 12 €/1000 km in the country-side but over 130€ in city centre • 2010 car had figures of 0,3 and 4 respectively. • Car turnover important • Get worst cars out of city centres • Differentiated envir. Congestion pricing • I&M • Cut smog – reporting • Parking?? and others Sterner Environmental Policy Making

36. Transport management (local) • Singapore Advanced Road Pricing • Curitiba dedicated express buss lanes • Banning of vehicles (Vikhram Tempo) • Cleaner fuel: Phase-out of lead • Green busses & taxis • Dia sin Auto • Roadside monitoring Sterner Environmental Policy Making

37. London Sterner Environmental Policy Making

38. Transport in MegaCities Sterner Environmental Policy Making

39. Fisheries • Rather like congestion • Fishermen would all be better off if effort brought down. • However a tax that collects all the rent will actually make the fishermen worse off • Fishery policy badly needed but typical policies are exact opposite of required! Sterner Environmental Policy Making

40. A Bio-economic model of fishing YIELD COST OF FISHING O MEY MSY OAE EFFORT  (and depletion) Sterner Environmental Policy Making

41. Over-fishing on Zanzibar Sterner Environmental Policy Making

42. Fishy Policies • Last natural frontier • Severe over fishing due to open access • POLICY NEEDED • Actual policies opposite to ideal • ITQs • Zoning, CPRs Sterner Environmental Policy Making

43. COD • Cod in Atlantic Banks outside Canada richest in the World • Crashed 1992 • 30 000 fishermen unemployed • No sign of recovery after 10 years! Sterner Environmental Policy Making

44. Iceland shows the way • World Cod catch down 75% since 1968 • 200 mile EFZ hopeful • Private transferable quotas as SHAREs in TAC • TAC decided by biologists Sterner Environmental Policy Making

45. Sweden • Lost North Sea • Fleet not scraped nor sold to Denmark. Fishes in Baltic • Coastal cod extinct • North sea cod severly overfished • EU sets agenda Sterner Environmental Policy Making

46. CPR or Tragedy of open access • Property rights are crucial for management • When yields are low/erratic CPR • Can work well for irrigation, pasture, fish • Clear boundaries; Exclusion; Democracy; Peer monitoring; ’Courts’; Graduated fines • New forms: CAMPFIRE, NPSP farming or informal sector AIE • Eco tourism, park fees. Pay for eco-services Sterner Environmental Policy Making

47. Industrial Pollution • The Classical Domain of Environmental Economics • Also relevant in many poor, industrialising countries • Often starts with information and regulation • Then moves to MBI, taxes/permits & Liability • Prohibition not necessarily best! Sterner Environmental Policy Making

48. Phase out of Trichloroethylene • (C2HCl3) Degreaser. Good Fat solvent… • Big Working Environment hazard • Phase out of CFCs lead to increased use • Forbidden in Sweden since 1991 • Very heavily regulated in for example Germany. Very strict regulation Sterner Environmental Policy Making

49. Phase out of Trichloroethylene • MC of abatement very flat • Most firms substitute • Some firms find it impossible & litigate • Why not use P instrument • Norway did! Sterner Environmental Policy Making

50. Phase out of Trichloroethylene Sterner Environmental Policy Making