Policy Costs and Impact on Residuals
Costs
What are "costs?" Returning to first principles
of economics, the fact of scarcity (we can't have everything we want with
the resources available to us) imposes choices on us--in the environmental
setting, this means that we face a trade-off between environmental goods
and other goods that we can have. That is, we must choose
between the levels of environmental quality that we want and the amount
of ordinary goods. Choosing more environmental quality inevitably
(apart from so-called "no regrets" policies that are rare) means that we
must have less of other goods--the foregone benefits from those goods are
the costs of the decision to have more environmental quality. NOTE:
costs, then, don't directly have anything to do with "dollars" (they are
full, foregone benefits--discuss cost of occupying home whether "paid for"
or not); but in many cases dollar payments do represent these foregone
benefits (discuss input costs of competitive firm producing pollution control
devices).
Costs of instituting an environmental policy take
the form of
-
Add-On Controls (typically, in past policy approaches, required and uniform--both
of which are undesirable in general)
-
Input or output substitutions (typically required--but sometimes explicitly
prohibited, even when environmental benefits are pronounced!--and including
"bans"--S&D diagram of latter)
-
Spatial/temporal relocations (typically not explored, despite frequent
dramatic cost savings for local damage reduction; indeed, legal interpretations
have sometimes thwarted very desirable movement, e.g. Sierra Club vs. EPA
on PSD legislation).
We will consider these cost categories in turn.
It should perhaps be noted that requiring a specific control device
or input substitution is not necessarily inefficient (that is, if the firm
were to required to get rid of a certain percentage of its emissions, it
might
have selected the required device or input substitution as its least-cost
means of eliminating those emissions). But, we shall see that as
an empirical matter, this is not so....
There are numerous examples of required add-on control
devices--catalytic converters for vehicles, SO2 scrubbers for power plant
smokestacks, etc.). This approach usually (apart from granted "variances")
involves control devices uniformly applied--that is, every car or smokestack
has to have the device regardless of what the benefits (and, in some cases,
the costs) are in their location. This is important: a polluting
plant in a large city or near an important environmental resource (Everglades
or Grand Canyon) *should* be controlled much more stringently than an otherwise
similar plant in a rural area or away from important damage receptors.
Also, requiring specific control devices implicitly presumes that the EPA
has knowledge equal to that of the polluting firm regarding sources of
pollution and costs of eliminating it--this is unlikely, hence the "required
costs" (which go along with the required devices) are likely to be substantially
higher than necessary for any given environmental improvement. [NOTE:
at one time this approach was all that we had available to us, because
it was impossible, or very costly, to monitor emissions. That
is no longer the case--continuous monitoring is now routinely available
at quite low cost; this will be seen as critical to the cost savings from
the economic incentive approach, an example of which is provided below.]
Required input or output substitutions are also
quite common (e.g. DDT, CFC, asbestos bans). Illustrating, the notion
is that the firm has chosen an input combination that is lowest cost (to
maximize profits) to the firm. But, that input combination might
not
be the lowest cost from society's perspective, allowing for external costs.
For example, a long-lived chlorinated hydrocarbon pesticide might be chosen
in farming as "least cost." But, there might be many external damages
(bio-concentrations becoming larger moving up the food chain, damages to
aquifers, runoff damage, etc.) that cause the social cost of this approach
to be quite high. Substituting to, say, malathion (which has a far
shorter residence time in the environment) might be far less costly when
all
costs are considered, although the farmer might need several applications
rather than just one (hence the private costs might be substantially higher,
despite the lower social costs). In such cases, a required substitution
might make a great deal of sense--but, again, taking an economic incentive
approach might lead to lower costs, yet (for example, some other input
substitution might be better yet, or waiting a short period of time might
result in the existence of a much less costly or better alternative).
NOTE: an outright ban is seldom warranted--even many very damaging
substances might have B>C in some settings or circumstances; a high tax
or low number of salable emission rights might allow such vital uses to
continue, while eliminating casual uses of those substances. Again,
as with required controls, it was once much easier to observe process changes
than to observe actual emissions--a rationale for employing required process
changes that is no longer as compelling.
Finally, although implicitly or explicitly not allowed
in most current policy, spatial or temporal relocation of pollutants sometimes
offers a low-cost alternative way of reducing total damages from residuals
in the environment. That is, there is a distribution over time and
space of polluting residuals and those residuals damage receptors downwind
or downstream. One possibility is to move the residuals over space
or time to reduce their damages by--in many cases--orders of magnitude.
For example, pollution in a large urban area or near an important pristene
environmental area may have damages thousands of times higher than that
same pollution if located where damages are lower. This approach
obviously does not address global environmental problems. But, once
the global concerns are addressed with optimal controls, it will still
be the case that relocations over space or time can yield additional benefits
for mankind and the environments we value.
Effects on Residuals (Emissions, Effluents, or Solid Wastes)
Clearly, there would be no point in incurring
costs (remember that is giving up other goods that we value) if they did
not result in any impact on residuals. That impact takes two forms--reduction
of residuals because of process changes (and the lower demands for the
higher-cost goods whose production involves pollution) and alteration in
the form of those residuals (importantly changing them air and water
pollutants to solid waste pollutants). We must change the nature
of residuals in some way or there is no possibility of environmental
improvement which is the whole point of incurring those costs! NOTE:
this is where the importance of the atmospheric modeler or hydrologist
comes in, in Box 2. We will discuss what these important modelers
do in greater detail in class.
An Example of the Efficiency Advantage of Economic Incentives Versus
Traditional Approaches
Over the many years during which required controls
and process changes have been imposed on firms and households in this country,
desires for ever-greater environmental quality stemming from growth in
income and population have led to high marginal costs (and, often, low
benefits!) of mandatory controls. Because of this we are seeing
increasing reliance on approaches that use economic incentives to
achieve environmental goals. To establish: Any given level of environmental
quality can be achieved at least social cost (scarce labor, capital, and
other resources) if those who are most efficient at fighting pollution
receive incentives to do so.
OBJECTIVE: To reduce Sulfur Dioxide Pollutant Discharges into the air
from 100,000 to 70,000 tons of pollutants per year (Why?--ideally, result
of comparison of B&C).
MARKET FEATURES: 5 different types of firms--
FIRM SO2 Emitted Cleanup
COST
COST COST
(tons) Cost/ton
Policy 1 Policy 2
Policy 3
A
30
$5 15x$5=$75
9x$5=$45 -$0-
(Why? Think!)
B
20
$4
5x$4=$20 6x$4=$24
-$0-
C
20
$3
5x$3=$15 6x$3=$18
-$0-
D
20
$2
5x$2=$10 6x$2=$12
20x$2=$40
E
10
$1
-$0- 3x$1=$03
10x$1=$10
TOT: 100
=$120 =$102
=$50
POLICY 1: No firm allowed to emit more than 15 tons of pollutants (15
from A-D, 10 E).
POLICY 2: Each firm cuts back 30% (21 from A, 14 from B-D, 7 from E)
POLICY 3: Emissions rights of 70% of prior year's pollution are:
a) sold by government, or
b) distributed to last year's firms in proportion
to last year's pollution, or
c) sold by me! (equity implications differ, not
much else)
NOTE:
1) Less than half the cost (real resources!) with the market
approach, compared to traditional command approaches. This is NOT
an unusual result in the real world, either!
2) There are transfers in the market approach which differ according
to whether taxes are charged, subsidies paid, or pollution permits distributed
and allowed to be exchanged. But, the substance of the argument
is unaffected (SR vs LR in subsidy case; where you want the uncertainty
in tax vs permit system)
3) Potential for even greater environmental quality (it costs less!);
additionally, environmental groups could buy up pollution rights and *not*
exercise them (cleaner yet).
4) Suppose demand for output of these firms goes up--what happens to
a) demand for the pollution rights?
b) levels of pollution?
c) relative outputs of the three firm types?