Pollution Abatement Subsidies and the Eco-Industry

This paper considers the combination of pollution taxes and abatement subsidies when some polluting firms procure their abatement goods and services from an oligopolistic eco-industry. The regulator must here cope with two simultaneous price distortions: one that comes from pollution and the other which is caused by the eco-industry’s market power. In this context, we show that taxing emissions while subsidizing polluters’ abatement efforts cannot lead to first-best, but the opposite occurs provided it is the eco-industry’s output which is subsidized. When public transfers also create distortions, welfare can be higher if the regulator uses only an emission tax, but subsidizing abatement suppliers while taxing emissions remains optimal when the eco-industry is concentrated.     

On modeling incentive systems which utilize pollution charges for pollution abatement

This paper examines a scheme of economic incentives for environmental protection, in which spatially differentiated pollution taxes are in use in compensating the pollution abatement costs. A simple mathematical model is described which determines an incentive system that encourages polluters to reduce the discharges to an acceptable level of ambient quality standards in a cost-effective manner. It is shown that the vector of pollution charges has to be proportional to the marginal abatement cost vector, but is smaller than the latter in magnitude. It is demonstrated that a necessary incentive effect may be achieved even if the total pollution charge is much lower (about three times) than the total abatement costs. It is also estimated how this charge incentive system reconciles conflicting criteria of cost-effectiveness and of equity. These conclusions are verified by numerical experiments with real data.     

Emission taxes and the market for abatement goods and services

This paper examines the effect of emission taxes on pollution abatement and social welfare, when abatement goods and services are provided by a Cournot oligopoly with free-entry. We point out initially that a higher tax not only increases demand for abatement; it also makes polluters less sensitive to price. This attracts a larger number of abatement suppliers while possibly inducing each one of them to produce less. Total abatement always goes up, however, when the delivery of abatement goods and services exhibits decreasing returns to scale. We then calculate the welfare-maximizing emission tax and compare it to the Pigouvian tax.     

Nonpoint Source Pollution Control under Incomplete and Costly Information

We analyze the efficient management of nonpoint source pollution (NPS) under a limited pollution control budget and incomplete information. We focus on the tradeoff between data collection and pollution abatement efforts by incorporating information acquisition into a NPS pollution control model. Comparative static results show conditions under which (i) a favorable change in the abatement costs at one source may lead to an increase in the treatment level at all sources, and vice versa, (ii) an increase in data collection cost leads to an increase in data collection level, and (iii) an increase in the efficiency of information acquisition leads to a decrease in the level of data collection. More importantly, the model simulations illustrate that acquiring and exploiting information on heterogeneity of sediment loading distributions across polluting sources leads to a more efficient budget allocation and hence a greater reduction in pollution damage than would be the case without such information.     

Regulating a Polluting Firm Under Asymmetric Information

This paper reinterprets the Laffont-Tirole model of regulation under asymmetric information to cover the case of pollution control. The asymmetry of information concerns the firm's cost of lowering its pollution. The regulator has three objectives: Ensuring an efficient abatement level, generating 'green taxes' and securing the survival of the firm. We show that when optimal abatement is important relative to tax generation, the regulator cannot use the policy of offering the firm a set of linear tax schemes from which to choose. By contrast, this policy is optimal in the Laffont-Tirole model under certain not very restrictive assumptions. We proceed to establish a simple rule for when to shut-down inefficient types. In an example with specific functional forms, we derive the optimal tax function both analytically and graphically. We show the effect on the optimal tax system of a change in a technological parameter.     

Regulating a Polluting Oligopoly: Emission Tax or Voluntary Agreement?

This paper compares, in a polluting oligopoly, an emission tax and a form of environmental policy called voluntary agreement (VA). Here there are two ways of reducing pollution: output contraction and end‐of‐pipe abatement. Given the imperfect competition, firms’ reaction to the tax is sub‐optimal. They reduce output excessively in order to raise the price and do not abate enough. The VA is a take‐it‐or‐leave‐it contract on abatement effort, offered to the firms with the threat of a tax. It has a limited effect on output and always allows higher abatement than the tax. We find that this kind of VA may be more efficient than the tax in a concentrated industry, when pollution is not too harmful and when the abatement technology is rather efficient and cheap.     

Pollution Policy and Trade Liberalization of Environmental Goods

During the Doha Round at the World Trade Organization, reductions in trade barriers on environmental goods (EG) were put forward as a means of helping developed and developing countries alike deal with current environmental problems. We examine the potential effectiveness of such a strategy in a developing country that imports all its consumption of EG from an imperfectly competitive foreign eco-industry. We point out that trade liberalization of EG might in fact lead to less stringent pollution taxes, which can result in an actual rise in pollution levels. We then show that the environmental effectiveness objective of this trade reform can be achieved when the regulator uses quantitative abatement standards as an alternative pollution policy instrument. However, this environmental achievement comes at the expense of social welfare.     

Abatement and Permits when Pollution is Uncertain and Violations are Fined

This paper considers a firm’s choice of abatement and of the number of permits if actual pollution is stochastic such that full compliance cannot be ensured. This straightforward extension induces non-trivial and unexpected comparative static properties, such as: permits and abatement can be either substitutes or complements, higher fines can lower the number of acquired permits (or abatement), and higher permit prices can reduce abatement. Yet integrating these reactions into a (competitive) permit market eliminates puzzling features. This is an additional justification of tradable permits over standards, where regulators must cope with potentially counterproductive firm reactions. A first version of the paper was written at the School of Finance and Economics, University of Technology, Sydney and I am grateful for the enjoyed hospitality. I am also grateful for the valuable comments from an anonymous referee.     

The effects of environmental policies on the abatement investment decisions of a green firm

This paper focuses on environmental policies aimed at rising investment in pollution abatement capital. We assume that ecological uncertainty, i.e., uncertainty over the dynamics of pollution, affects firm investment decisions. Capital irreversibility is not postulated but endogenized using a quadratic adjustment cost function. Using this framework, we study the effects of environmental policies considering taxes on polluting inputs and subsidies to reduce the cost of abatement capital. Environmental policies promoted to enforce abatement capital may generate the unexpected result of reducing the abatement investment rate.     

Strategy Proof Uniform Effort Sharing Schemes For Transfrontier Pollution Problems

Uniform effort sharing rules for transfrontier pollution problems, like the popular equal percentage reduction arrangement, do not result in a cost efficient allocation of emission abatement efforts. In addition, they may violate voluntary participation constraints if the uniform effort level is decided upon by means of ordinary majority vote. In contrast to ordinary majority vote, I consider in this paper the so-called conservative mechanism by Moulin (1994) which picks the smallest revealed effort level in stead of the median. The conservative mechanism always respects a weak participation constraint. Moreover, it is coalitionally strategy proof meaning that no individual player, or group of players, can achieve a better outcome by misrepresenting its preferences for environmental quality. In order to remedy the cost inefficiency of the equal percentage arrangements, I propose to apply the conservative mechanism to the choice of a uniform emission tax rate. Simulations for the greenhouse effect indicate that the latter mechanism does considerably better than the traditional equal percentage arrangement.     

Technical Change and Measuring Pollution Abatement Costs: An Activity Analysis Framework

The cornerstones of studies that estimate the effectof environmental regulations on an economy areestimates of the pollution abatement costs incurred bythe manufacturing and electric utility sectors.However, there are concerns regarding the accuracy ofthe surveys used to generate these cost estimates.This paper demonstrates that technical change tends toresult in an increasing share of pollution abatementcosts being impossible to measure. This finding hasimportant implications for estimating the productivityeffects of environmental regulations, developingregulatory budgets, and data collection effortsrelated to environmental accounting.     

Disutility of pollution and endogenous growth

Endogenous growth is generally built on a positive externality hypothesis which is the opposite of a negative externality caused by pollution. We study a linear technology with simple assumption: an aggregate capital stock which represents a learning by doing effect and a pollution flow proportional to production. In this framework, we analyse the precise effects on growth of the disutility of pollution and its interaction with the utility of consumption in an economy without abatement technology. The decentralized equilibrium always leads to unlimited growth, but optimal growth is often limited (the negative effect of pollution dominating the positive effect of learning by doing). In this case, the optimal policy which leads the decentralized economy to follow the optimal growth path is to tax capital; in contrast with the optimal subsidy policy in an economy without pollution. When an abatement technology is introduced, the optimal solution can lead the economy to unlimited growth, whatever the form of the utility function.     

Intertemporal Emission Permits Trading Under Uncertainty and Irreversibility

This paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain. We examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time. A firm can invest in clean capital (an improved pollution abatement technology) to reduce its abatement cost. We consider two possibilities: that investment is reversible or irreversible. Uncertainty is captured within a two period model: only the current period cap is known. We show that if banking is positive and marginal abatement costs are sufficiently convex, there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking. These results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital. Moreover, under uncertainty and irreversibility, we find that there are cases where banking enables firms to invest more in clean capital.     

Reforms of Environmental Policies in the Presence of Cross‐border Pollution and Public–Private Clean‐up*

We construct a two‐country model where pollution from production is transmitted across borders. Pollution abatement is undertaken by both private producers and the public sector. We characterize Nash optimal levels of the policy instruments in the two countries: emission taxes and funds allocated for public abatement activities. We examine the implications of a number of multilateral policy reforms. One of our findings is that the magnitude of the beneficial effect of a reform depends on the scope of the reform; if it is restricted to a subset of policy instruments, then the efficacy of environmental policy reform can be greatly undermined.     

Socioeconomic dimensions of mercury pollution abatement: Engaging artisanal mining communities in Sub-Saharan Africa

In recent years, strategies to tackle mercury pollution from artisanal gold mining have mainly included restrictions — banning mercury trade internationally, prescribing alternate technologies and tightening regulations on mining (e.g. banning mercury use). However, artisanal mining communities in Africa are often trapped in cycles of poverty that make it difficult for workers to improve technologies and reduce mercury pollution. This article assesses problems with narrow pollution abatement discourses and top-down regulations, examining the need for integrated approaches to address pollution and socioeconomic challenges in low income mining communities. It advances the hypothesis that pollution abatement strategies fail if they do not explicitly address local socioeconomic capacities for improving environmental management, informed by an adaptive understanding of labor dynamics. Case studies in Mozambique and Tanzania are examined where United Nations pilot projects sought to address local challenges. These combined training on improved technologies and environmental risk mitigation with efforts to empower miners by enhancing access to microfinance services and fairer gold marketing arrangements. These case studies demonstrate adaptive ways of engaging local concerns in mining areas, highlighting lessons that are especially urgent now that recent policy commitments from Europe and the United States to ban mercury exports have specifically sought to make mercury more expensive for African mining communities. Ultimately, the analysis suggests how regionally focused ecological economics research has a vital role to play in (a) revealing how narrowly conceived responses to pollution can yield counterproductive results as well as exacerbate exploitative labor conditions in low income contexts; and (b) stimulating analytic focus on innovative ways of integrating pollution reduction strategy with grassroots socioeconomic empowerment strategies.     

Rethinking the optimal level of environmental quality: justifications for strict environmental policy

Traditional environmental theory suggests that the optimal level of a pollution emission occurs when the marginal damage created by the emissions is equal to the marginal cost of reducing the emissions. We argue that the benefits from reducing pollution should be much more broadly defined to include at least three other sources of benefits. First, we develop a game-theoretic model in which firms may under-invest in cost-saving ‘green technologies’. Second, we demonstrate that consideration of future damages and abatement costs leads to a lower current optimal pollution level than that obtained in traditional models. Finally, we show that ecological complexity creates indirect pathways by which greater pollution increases the likelihood of generating irreversible environmental damage. This broader definition of the benefits of pollution abatement yields an optimal level of pollution that may actually be less than the level at which conventionally-measured marginal damages are equal to marginal abatement costs. Thus, environmental policy should be stricter.     

Adjusting the measurement of US manufacturing productivity for air pollution emissions control

We estimate a distance function and derive producer shadow prices for SO₂ and PM-10 emissions. The shadow prices are used to adjust a traditional measure of total factor productivity growth in order to account for the reallocation of inputs from production of the marketed output to pollution abatement activities. Adjusted total factor productivity growth rates are calculated for the two-digit SIC manufacturing industries in the United States for 1970–1996. The results indicate that including the “output” of pollution abatement activities has a measurable effect on the productivity of many industries in the manufacturing sector.     

Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units

This paper answers three questions related to the discrete nature of pollution abatement: (i) does a source’s incremental control cost (as defined by the U.S. Environmental Protection Agency) necessarily exceed its average control cost, (ii) is incremental control cost a better approximation of a source’s willingness to pay for abatement credits than average control cost, and (iii) exactly how does trading in discrete and continuous abatement markets differ? We find that the answer to the first two questions are both “no”, suggesting that the U.S. Environmental Protection Agency needs to refine its reliance on incremental control cost as the sole measure upon which to assess the financial feasibility of water quality trading. In answer to the third question, we show that the outcome of bilateral trading in the presence of discrete abatement is determined by comparing the gains from trade associated with the full sequence of possible “sunk cost trading” scenarios. For the most common case where trading partners’ average control cost curves “cross,” the trading outcome with discrete abatement is inherently sensitive to the initial allocation of abatement responsibilities.     

Investment and emission control under technology and pollution externalities

This paper studies incentives to develop advanced pollution abatement technology when technology may spillover across agents and pollution abatement is a public good. We are motivated by a variety of pollution control issues where solutions require the development and implementation of new pollution abatement technologies. We show that at the Nash equilibrium of a simultaneous-move game with R&D investment and emission abatement, whether the free rider effect prevails and under-investment and excess emissions occur depends on the degree of technology spillovers and the effect of R&D on the marginal abatement costs. There are cases in which, contrary to conventional wisdom, Nash equilibrium investments in emissions reductions exceed the first-best case.     

Climate policy in Western Europe and avoided costs of air pollution control

Abatement of CO₂ emissions will be accompanied by reduced air pollutant emissions such as particulate matter (PM), SO₂, and NO_x. This, in turn, will reduce the need for end of pipe (EOP) pollution control technologies to meet future air quality targets. This dynamic could put more stringent air quality goals within reach, and increase the political feasibility of climate policy. This paper presents a CGE model that has been modified to include the emissions and EOP abatement of PM, SO₂, and NO_x from stationary sources in the EU-17. Emissions of pollutants are modeled as fixed-factor complementary inputs to their associated source. Abatement in each sector is modeled as a substitution between the pollutants and discrete abatement technologies, each of which is sector-specific and characterized by a marginal abatement cost and technical capacity constraint. Scenarios are run to 2020, to assess the costs and co-benefits of simultaneous air quality and climate policies. We find that under the Kyoto Protocol in 2010, the welfare cost of pollution control is reduced by 16% compared to the baseline, effectively offsetting the cost of CO₂ abatement by 15%. The co-benefit results depend heavily on policy choices, and their magnitude relative to total costs is likely to decline as greenhouse targets become more ambitious. In our scenarios, pollution control cost savings range from 1.3 to 20% in 2020, yielding a climate cost offset range of 0.2 to 3.9%. The CO₂ credit imports allowed by the EU via the Clean Development Mechanism (CDM) offer a total savings of $9.7bn in 2020, but only need to be compensated by an additional $0.3–0.4bn in domestic pollution control from stationary sources.