Environmental Economics and Management: Theory, Policy, and Applications 6e

1. Environmental Economics and Management: Theory, Policy, and Applications 6e by Scott J. Callan and Janet M. Thomas Slides created by Janet M. Thomas

2. Chapter 8 Assessing Costs for Environmental Decision Making

3. Environmental CostsConceptual Issues • Incremental costs are the change in costs arising from an environmental policy initiative • Economic costs include • Explicit (or monetary) costs • Implicit (or nonmonetary) costs • Ideal measure is the social costs of policy • Expenditures needed to compensate society for resources used so that its utility level remains the same

4. Explicit Costs • Administrative, monitoring, and enforcement expenses incurred by the public sector plus compliance costs incurred by all sectors • Capital (or fixed) costs • spending on plant, equipment, construction, and process changes for pollution abatement • Operating (or variable) costs • costs of operating and maintaining abatement processes

5. Implicit Costs • Value of nonmonetary effects that negatively affect society’s well-being • Examples included diminished product variety, time costs of searching for substitutes, reduced convenience, etc.

6. Modeling Incremental Costs • Find baseline TSC before policy • Find TSC after policy is implemented • Subtract baseline from new TSC • TSC can be found as area under MSC • Recall MSC = MACMKT + MCE

7. MSC and TSC of Abatement MSC = 4 + 0.75A MSC = MACMKT + MCE MSC ($millions) TSC 4 0 A1 A (abatement %)

8. Incremental costs = $104.375 million Modeling Incremental Costs MSC = 4 + 0.75A MSC = MACMKT + MCE 22.75 19 MSC ($millions) 4 0 20 25 A (abatement %)

9. Incremental costs = $104.375 million Modeling Incremental Costs TSC TSC ($millions) TSC = 4A + 0.375A2 334.375 230 0 20 25 A (abatement %)

10. Estimating Explicit Costs • Two methods • Engineering Approach • Survey Approach • Common to use a combination approach

11. Engineering Approach • Estimates abatement spending based on least-cost available technology • Relies on experts in abatement methods • Drawbacks • difficult to use for proposed policy due to uncertainty • must be customized to suit each production setting or suffer from averaging • unable to capture firm heterogeneity as a generalized estimate • likely understates true costs because it assumes all firms are cost-effective

12. Survey Approach • Derives estimated abatement expenditures from a sample of polluting sources via surveys • Drawbacks • assumes sources are sufficiently well-informed • polluters have an incentive to exaggerate costs to officials to increase the probability that the proposed regulation will be rejected

13. Cost Classifications • By economic sector • Shows cost distribution across public and private sectors • By environmental media • Shows how costs vary across air, water, and solid waste abatement activities • How are standards on GHG emissions from vehicles expected to affect automakers’ abatement costs? (See the boxed Application.)

14. Pollution Abatement Costs by Industry (2005 data) Note: Data are in 2010 dollars Source: U.S. Census Bureau (2008).

15. Pollution Abatement Costs by Media (2005 Data)