Policy for Market failure Prescriptive/Command and Control Strategies: “Standards”

1. Policy for Market failure Prescriptive/Command and Control Strategies: “Standards”

2. Instrument taxonomy Early environmental policies, such as the Clean Air Act of 1970 and the Clean Water Act of 1972, relied almost exclusively on the command and control (standards) approach. (Stavins, 1998)

3. There are two main types of standards: (1) Performance, & (2) Technology • Performance standard: a regulation prescribing a maximum or minimum allowable level of a given metric Two common forms: • Rate: a max or min allowable rate, e.g. • a max allowable level for a quantity of emissions from a polluter (emissions/year; emissions/(unit of input); emissions/(unit of output) • a minimum performance level of some “machinery” (fuel efficiency in autos; efficiency of lightbulbs) • Ambient concentration: a max allowable level for a pollutant in the environment • E.g. TMDLs (Total Maximum Daily Loads of contaminants in streams and rivers)

4. There are two main types of standards: (1) Performance, & (2) Technology • Technology based standard: a regulation prescribing the method (sometimes the actual equipment) that agents must use.

5. Example: Clean Air Act of 1970 • Required that costly scrubbers be used by coal-fired electricity plants even though it would have been cheaper to achieve SO2 reductions by substituting to low sulfur coal. • Imposed by senators from eastern states with high sulfur coal. • Political feasibility: could not otherwise have passed congress. Hackett, S., Environmental and Natural Resources Economics: Theory, Policy, and the Sustainable Society, 3rd Edition (New York: M.E. Sharpe, 2006), p. 224.

6. 1/27/16: California Energy Commission adopts nation's first-ever rules for LED lighting (Mulkern, Greenwire, 1/28/16) • Claimed effect: >$4B energy savings over 13 years; conserve electricity to power ~400K average homes.

7. Basic model of performance standards (standard pollution control model) • Initial emissions, e1 • Impose a standard of a maximum of e* tons/year emitted • Given e*, what area represents: • total abatement cost, TAC? • total damage, TD? b c

8. Basic model of performance standards (standard pollution control model) • Initial emissions, e1 • Impose a standard of a maximum of e* tons/year emitted • Given e*, what area represents: • total abatement cost, TAC? • total damage, TD? b c

9. Standards are often set uniformly but this is not typically cost-effective • uniform: e.g. identical across firms. • The central issue in assessing the cost effectiveness of standards • Typically firms will have different MAC functions • Uniform standard will not be cost-effective

10. Cost effective pollution control: Minimizing costs $ • e: emissions perf. standard • What area represents total abatement costs (TACA) for this single polluter? MACA Z e0 e emissions, e abatement

11. Cost effective pollution control: Minimizing costs $ MACB • e: emissions perf. standard (uniform across both A & B) • What area represents total abatement costs, in agg. for both polluters: TAC = TACA +TACB? • Is the uniform standard cost effective? MACA Y Z eA = eB = e0 e emissions, e

12. Cost effective pollution control: Minimizing costs $ MACB • e: emissions perf. standard (uniform across both A & B) • What area represents total abatement costs, in agg. for both polluters: TAC = TACA +TACB? • Is the uniform standard cost effective? MACA Y Z eA = eB = e0 e emissions, e

13. Cost effective pollution control: Minimizing costs • e * 2 = e*A + e*B reallocate abatement but keep aggregate emissions the same  non-uniform std. • What area represents total abatement costs, in agg. for both polluters: TAC = TACA +TACB? • What expression specifies reduced TAC from non-uniform standard? $ MACB MACA Y1 Note: Y=Y1+Y2 Z=Z1+Z2 Y2 X Z1 Z2 e0 e emissions, e eA = e*A eB = e*B

14. Arguments against uniformity: • When MACs differ among source  not cost-effective • Equal treatment is not necessarily equitable Arguments for uniform standards: • Equal treatment • Easier to implement • to make non-uniform standards cost-effective, you need the MAC function for every source – a costly information requirement

15. Empirical evidence: standards can be (close to) c.e. in some cases but vastly more expensive in others. In a survey of 8 empirical studies of air pollution control….C&C standards were anywhere from 1.07 to 22.0 times more costly (TAC) to implement • relative to least-cost alternative policy www.tva.gov/ (Stavins, 1998)

16. When might standards be preferable? • Hotspots: market-based instruments may allow for areas of high pollution which is problematic for some emissions (e.g. mercury). • Clear winners: certain control technology may be so effective/ available that mandating is more effective than regulating “emissions” (e.g. double-hulled oil tankers). • Performance unobserved: Too costly to effectively monitor emissions (e.g. catalytic converters on automobiles). NADP 2014: precipitation-weighted mean concentrations and deposition image: Yes I Can Science behance.net

17. Summary of conclusions on standards in policy • Potential weaknesses: • Lack cost effectiveness • Limited flexibility in achieving goals • Difficult to set cost-effective non-uniform standards • Weak incentive for innovation (relative to other policies) • may lock in particular technologies • Potential advantages: • Relatively simple and straightforward • Relatively modest monitoring and enforcement costs • Can avoid “hotspots”

18. Optional slides

19. Incentives generated by standards (long-run impacts) • Technology innovation • Conceptual model: + demand for abatement tech. + R&D  + technology innovation  MAC curve falls • Standards: tend to freeze development of technologies which would lead to greater levels of control. • Especially technology standards • Little or no financial incentive to exceed control targets (Stavins, 1998) • A business that adopts a new technology may be "rewarded" by being held to a higher standard of performance

20. Use the basic model to examine incentives for innovation • Start: MAC1 … innovationMAC2 Questions: • Given a mandated standard of e2 (assume compliance is perfect) • What level of abatement does the firm choose? (Under MAC1? MAC2?) • What is the firm’s TAC (total abatement cost) at this level? • What is the incentive (the benefit to the firm) to innovating? • The new (post-innovation) socially efficient level of emissions is e3, • What happens to R&D incentive if the firm believes the post-innovation standard will be set to e3?

21. Cost effective pollution control: Minimizing costs This is how your textbook presents the ideas from the slide “Cost effective pollution control: Minimizing costs”. (Can be more confusing for some.) What does the area described by c represent? K&O, figure 9.1

22. EPA Sets Thresholds for Greenhouse Gas Permitting • July 2011: Clean Air Act permitting requirements for GHGs will kick in for large facilities • all new facilities with GHG emissions of at least 100,000 tpy and • modifications at existing facilities that would increase GHG emissions by at least 75,000 tpy • must use best available control technologies to minimize GHG emission increases