By Winton Harrington & Richard D. Morgenstern Fall/Winter 2004, Resources , pp. 13-17.

1. “Economic Incentive ----- Versus-----Command and Control:What’s the Best Approach for Solving Environmental Problems” By Winton Harrington & Richard D. Morgenstern Fall/Winter 2004, Resources, pp. 13-17. http://www.rff.org/RFF/Documents/RFF_Resources_152_ecoincentives.pdf

2. No Single Solution • Economic Incentives (EI) • Some sort of monetary fee/fine per unit of pollution emitted • Command and Control (CAC) • Direct regulation • Study looked at six environmental policies in the United States and European Union.

3. Six Policies • SO2 emissions from utility boilers • Permit Market (US) • Sulfur Emissions Standards (Germany) • NOX emissions from utility boiler s • Emission Taxes (Sweden and France) • New Source Performance Standards (U.S.) • Industrial Water Pollution • Effluent fees (Netherlands) • Effluent Guidelines and National Pollutant Discharge Eliminations System Permits (U.S.) • Leaded Gasoline • Marketable Permits for leaded fuel production (U.S.) • Mandatory Lead phase out differential taxes to prevent misfueling (most of Europe) • Chlorofluorocarbons (CFCs) • Permit Market (U.S.) • Mandatory Phase Out (Other Industrial Countries) • Chlorinated Solvents • Source Regulation (U.S.) • Three Distinct Policies (Germany, Sweden, Norway)

4. Evolution of the Policy • In the 1970s, CAC approach was predominant. • Policymakers switched over to a more EI policy sometime between the 1970s &1990s. • Could be because they were more aware • Also, it could be because tradable emissions permits in the 70s came into existence • Could just be disappointment in CAC regulations

5. The Two Sides of the Pond: Comparisons • The United States is a single federal body whereas the European Union is multiple countries. • Differences in pre-regulatory studies undertaken. • U.S. EPA is required to conduct a Regulatory Impact Study before taking action. So, it is easier to determine the possible benefits. • Environmental Taxes are virtually nonexistent in the U.S. • Europe uses regulatory taxes more often.

6. Testing the Hypothesis • What’s the Best Approach? • The authors compiled 12 most commonly used hypotheses. • Then they focused on the five that they felt were the most important.

7. 1) EI More Efficient than CAC • There is a perceived efficiency of EI over CAC. Not Air Tight case though. • EI is more cost effective at given emissions reduction. • However, efficiency requires a system of perfect competition and emissions are not location specific. • In the US for instance: • EI achieved substantial cost savings in elimination of CFCs, and lead in gasoline • lowered SO2 emissions & realized costs are 1/2 of expectations in 1990 and a 1/4 of expected CAC cost. • However where EI are too strict, EI do not achieve cost savings over CAC

8. 2) EI Gives Continual Incentive for New Technology • EI is sometimes favored because it seems not to hamper technology in the same way as CAC. • E.g. in Sweden, the NOx tax caused experimentation in boilers • U.S. research shows that CAC only encourages cost-reducing innovation, while EI causes cost-reducing and emission reducing innovation.

9. 3) CAC policy achieves objectives quicker & w/ more certainty • In the 1970s, CAC was effective in causing quick compliance in some cases. • Solvent Trichloroethylene (TCE) phase out resulted in little participation w/ EI aspects in the U.S. • Europe needed to use CAC in addition to Tax Differentials to achieve any progress by: • Mandating Catalytic Converters • Maximum Lead Content • On the other hand EI was effective: • In Holland, the influence of effluent fees (a EI) on organic waste load reductions was prompt and large. • The problem is that both policies can have undesirable long term effects. • Regulated new coal power plants just extend the life of older non-regulated ones. • In Sweden, TCE users gained multiple waivers.

10. 4) Regulated Industry prefers CAC • EI has lower social costs, but has higher costs to the firms • In many industries, the firm pays the cost of abatement plus a fee for the remaining pollution it discharges. • In reality, nearly all governments eliminate the burden of the EI instruments by returning fees to the firm • France subsidized the firms’ abatement investments on NOx discharge fees. • Sweden fees were returned on the basis of the energy they produced. • In the U.S., tradable permits have always been given away rather than auctioned off.

11. 5) CAC have higher Administration Cost • EI fees for increased emissions tend to rise gradually, whereas in CAC a line separates compliance from violation. • No clear pattern. • Both CAC Effluent Guidelines and EI lead phase down program put higher costs on EPA. • US EI SO2 program had low admin. costs. • Germany CAC SO2 program had roughly same costs as EI

12. Conclusions • EI appears to produce costs savings in pollution abatement as well as innovation. • Firms prefer CAC regulation because of a perceived lower cost to them. • Today, most policy is a blend of both, and they have been successful. • Emissions fell by 2/3 compared to base line results.