A dynamic general equilibrium model of pollution abatement under learning by doing

In 2013, Beladi et al. constructed a dynamic general equilibrium model of pollution, and characterized a steady-state equilibrium. In this paper, we extend Beladi et al.’s model to an even more general model in which the pollution abatement costs under learning by doing are taken into account. In our model, the instantaneous abatement costs depend on both the rate of abatement and the experience of using a technology. Our objective is to apply optimal control theory to investigate the dynamic general equilibrium model of pollution abatement, and derive the steady-state equilibrium properties and optimal levels of emission permits and pollution treatment.     

Water pollution abatement by Chinese industry: cost estimates and policy implications

Factory-level data are used to estimate water pollution abatement costs for Chinese industry. Joint abatement cost functions are utilized which relate total costs to treatment volume and the simultaneous effect of reductions in suspended solids, chemical oxygen demand, biological oxygen demand and other pollutants. Tests of alternative functional forms suggest that a very simple (constant elasticity) model fits the data as well as a complex (translog) model, permitting sophisticated policy experiments with relatively simple calculations. From the results, the cost-effectiveness of current pollution control policy in China is analysed. Basic conclusions are (1) The benefits of stricter discharge standards should be weighed carefully against the costs. For the sample of 260 factories, a shift across the existing range of standards entails a present-value difference of US$330 million in abatement costs. (2) Emissions charges as low as US$1.00/ton would be sufficient to induce 80% abatement of suspended solids for cost-minimizing factories. Charges of US$3, US$15 and US$30 per ton would be sufficient to induce 90% abatement of TSS, COD and BOD. (3) The current regulatory system provides an economic incentive to abate by charging a levy on pollution in excess of the standard. However, the results suggest that changing to a full emissions charge system would greatly reduce overall abatement costs. For the 260 factories in the sample, the current overall abatement rate could be attained under a charge system at a reduced annual cost whose present value is US$344 million.     

Does Technological Innovation Really Reduce Marginal Abatement Costs? Some Theory,Algebraic Evidence,and Policy Implications

The existing literature models innovation in pollution control as a reduction in marginal abatement costs. We show that this assumption is inappropriate for production process innovations such as fuel switching. Algebraically, we examine the effects of different innovation types on marginal abatement cost curves, showing that some desirable innovations increase marginal abatement costs. Empirically, we estimate marginal abatement costs for sulfur dioxide by measuring the output distance function for electric power in Korea. Regression results confirm that production process innovations did raise marginal abatement costs in this case. One policy implication: economic instruments do not always provide stronger innovation incentives than command-and-control policies.      

A Note on Emissions Taxes and Incomplete Information

In contrast with what we perceive is the conventional wisdom about setting a second-best emissions tax to control a uniformly mixed pollutant under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if marginal damage is increasing and there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.     

Transboundary air pollution and soil acidification: A dynamic analysis of an acid rain game between Finland and the USSR

Transboundary air pollution is analysed as a dynamic game between Finland and the nearby areas of the Soviet Union. Sulphur emissions are used as the environmental control variables and the acidities of the soils as the state variables. Acidification is consequently considered to be a stock pollutant having long-lasting harmful effects on the environment. The state dynamics consist of two relationships: first, of a sulphur transportation model between the regions and, second, of a model describing how the quality of the soil is affected by sulphur deposition. The countries are assumed to be interested in maximizing the net benefits from pollution control as measured by the impacts on the values of forest growth net of the abatement costs. Cooperative and noncooperative solutions of the game are compared to assess the benefits of bilateral cooperation. Using empirical estimates of abatement costs, acidification dynamics and impacts on forest growth it is shown that cooperation is beneficial to Finland but not to the Soviet Union. Consequently, Finland has to offer monetary compensation to induce her neighbor to invest in environmental protection.     

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.     

Alternative Approaches to Cost Containment in a Cap-and-Trade System

We compare several emissions reduction instruments, including quantity policies with banking and borrowing, price policies, and hybrid policies (safety valve and price collar), using a dynamic model with stochastic baseline emissions. The instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options. Based on simulation analysis with the model parameterized to values relevant to proposed US climate mitigation policies, we find that restrictions on banking and borrowing, including the provision of interest rates on the borrowings, can severely limit the value of the policy, depending on the regulator-chosen allowance issuance path. Although emissions taxes generally provide the lowest expected abatement costs, a cap-and-trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax, but with lower emissions variance than a tax. Consistently, a price collar is more cost-effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline.     

Capturing the least costly way of reducing pollution: A shadow price approach

The production analysis literature is increasingly concerned with estimating marginal abatement costs. Yet, most studies do not emphasize the ways in which pollutants may be reduced and their costs, which makes them unable to identify the least costly compliance strategy. This paper utilizes the materials balance principle to relate pollution to the employment of material inputs. A production model which allows input and output substitution, downscaling of operations, pollution control, and emission permits purchases as compliance strategies is proposed, and the implications of joint and non-joint pollution controls for the trade-off between pollutants and desirable outputs are considered. Marginal abatement costs, reflecting the least costly way of compliance, are derived by exploiting the duality between the directional distance function and the profit function.     

Cost Uncertainty and Unilateral Abatement

Unilateral abatement is sometimes advocated in order to set a good example that will make other countries follow. The aim of this paper is to investigate whether existence of correlated cost uncertainty provides an incentive for a country to undertake unilateral abatement. The theoretical model is driven by two main mechanisms; first, a learning effect, as the follower country might reduce its risk premium as it can observe the cost level in the leader country. Second, there is the public good effect, i.e., the marginal benefit of abatement declines when abatement is a public good and other countries contribute to pollution reductions. Results shows that unilateral abatement would be efficient in reducing uncertainty about the unit costs of abatement if a country with low cost uncertainty would undertake abatement first, while a country with initially high cost uncertainty would follow. However, countries may prefer to act simultaneously because of the larger uncertainties that are inherent in a sequential game.      

The relationship between pollution abatement costs and environmental regulation: Evidence from the Chinese industrial sector

Since the 2000s, China has been trying to strengthen emission controls in response to increasing pollution problems. However, strict implementation of emission controls generates pollution abatement costs. Using regional data for 29 provinces in the Chinese industrial sector from 1995 to 2010, this study estimated the pollution abatement costs for each province through the measurement of environmental efficiency, by applying a directional distance function approach. Moreover, using panel data analysis, this study clarified whether there is a nonlinear relationship between pollution abatement costs and environmental regulations. The empirical results are as follows. The study confirmed that the burden of abatement costs tended not only to occur in the central and western regions but also to increase in the eastern region. Moreover, the nonlinear relationship is inverted U‐shaped; thus, pollution abatement costs increase, as a negative effect of environmental regulations, until a certain inflection point, after which they decrease.     

Static and dynamic efficiency of pollution control strategies

A great deal of the economic literature on pollution control strategies concentrates on the efficiency of environmental policy instruments. Most analytical studies in this field show that market instruments are more efficient with respect to the cost of pollution abatement of a given number of polluters than non-market instruments. According to several analytical studies, market instruments should also be more efficient with respect to innovation in pollution abatement equipment than non-market instruments. In the empirical literature a great number of case studies exist with estimations of the savings of abatement costs of market instruments in a situation without technological progress. Empirical studies about the impact of environmental policy market instruments on the abatement costs in situations with technological progress are lacking.The purpose of this paper is to fill this gap. The paper deals with an empirical estimation of abatement costs for the emission of SO₂ of coal-fired electricity units in the Netherlands from 1985 to 2000. First, the working of market instruments and non-market instruments (the existing environmental policy of the Dutch government) is simulated in a static situation. Second, we analyse the learning effects of flue gas desulphurization. The efficiency advantage of market instruments turns out to be larger in a situation of technological progress than in a static situation.     

Comparing Environmental Policy Instruments in the Presence of Imperfect Compliance – A Case Study

In this paper, we aim to include rule making, implementation, monitoring and enforcement costs into the cost comparison of policy instruments. We use a simple partial equilibrium model and apply it to the textile industry. The model includes discrete abatement functions and costly monitoring and enforcement. The case study uses individual firm data to simulate the differences in abatement costs and compliance decisions between firms. We compare combinations of regulatory instruments (emission taxes, emission standards and technology standards) and enforcement instruments (criminal fines, civil fines and transaction offers). We show that the inclusion of information, monitoring and enforcement costs indeed alters the relative cost efficiency of the different instruments.     

How Large are the Welfare Gains from Technological Innovation Induced by Environmental Policies?

This paper examines whether the welfare gains from technological innovation that reduces future abatement costs are larger or smaller than the Pigouvian welfare gains from optimal pollution control. The relative welfare gains from innovation depend on three key factors—the initially optimal level of abatement, the speed at which innovation reduces future abatement costs, and the discount rate. We calculate the welfare gains from innovation under a variety of different scenarios. Mostly they are less than the Pigouvian welfare gains. To be greater, innovation must reduce abatement costs substantially and quickly and the initially optimal abatement level must be fairly modest.     

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.     

Using Non Market Valuation to Inform the Choice Between Permits and Fees in Environmental Regulation

The purpose of this short note is to open an exploration regarding the use of non market valuation to help guide the selection of economically efficient pollution control instruments. As long as non market valuation techniques can correctly estimate the slope of the marginal benefit of abatement curve, this information along with engineering cost estimates of the unit costs or slope of the marginal abatement cost will provide useful information to policy makers in choosing between fees and permits. An illustrative review of the literature suggests that both stated and revealed preference methods have estimated slopes of marginal benefit functions for reducing several pollutants. To investigate the efficiency of permits versus fees, an illustrative review of corresponding marginal abatement costs is also made. For air pollutants affecting visibility, the slope of the marginal benefit curve is far greater than the slope of the marginal abatement costs, suggesting permits as the efficient instrument. For nitrates in groundwater used for drinking, the marginal benefit curve is flatter than the rather steep marginal abatement cost, suggesting fees/taxes would be a more efficient economic instrument. We hope this note stimulates more emphasis in non market valuation on estimating the slope of the marginal benefit function to enhance environmental economists ability to make policy recommendations regarding the choice of pollution instruments for specific pollutants.      

Greenhouse Gas Abatement Cost Curves of the Residential Heating Market: A Microeconomic Approach

In this paper, we develop a microeconomic approach to deduce greenhouse gas abatement cost curves of the residential heating sector. Our research is based on a system dynamics microsimulation of private households’ investment decisions for heating systems to the year 2030. By accounting for household-specific characteristics, we investigate the welfare costs of different abatement policies in terms of the compensating variation and the excess burden. We investigate two policies: (i) a carbon tax and (ii) subsidies on heating system investments. We deduce abatement cost curves for both policies by simulating welfare costs and greenhouse gas emissions to the year 2030. We find that (i) welfare-based abatement costs are generally higher than pure technical equipment costs; (ii) given utility maximizing households a carbon tax is the most welfare-efficient policy and; (iii) if households are not utility maximizing, a subsidy on investments may have lower marginal greenhouse gas abatement costs than a carbon tax.     

Gross world product and consumption in a global warming model with endogenous technological change

This paper analyzes the macro-economic costs and effects on consumption and energy demand of limiting the global average atmospheric temperature increase to 2 °C. We use a macro-economic model in which there are two competing energy technologies (carbon and non-carbon, respectively), technological change is represented endogenously, and energy is aggregated through a CES function implying positive demand for the relatively expensive non-carbon technology. Technological change is represented through a learning curve describing decreasing energy production costs as a function of cumulative experience. We find that energy savings constitutes an important mechanism for decreasing abatement costs in the short- and medium-term, while the acquisition of additional learning experience substantially decreases abatement costs in the longer-term.     

Games of Climate Change with International Trade

We analyse games of greenhouse gas emission reduction in which the emissions and the emission reduction costs of one country depend on other countries' emission abatement. In an analytically tractable model, we show that international trade effects on costs and emissions can either increase or decrease incentives to reduce emissions and to cooperate on emission abatement; in some specifications, optimal emission reduction is unaffected by trade. We therefore specify the model further, calibrating it to larger models that estimate the costs of emission reduction, trade effects, and impacts of climate change. If trade effects are driven by total emission reduction costs of other countries cooperation is slightly more difficult than in the case without trade effects. If trade effects are determined by relative emission reduction efforts in other countries, cooperation becomes easier. Carbon leakage does not affect our qualitative insights, although it does change the numbers.     

Optimal management of a eutrophied coastal ecosystem: balancing agricultural and municipal abatement measures

Agriculture and municipal wastewater are the principal sources of eutrophying nutrients in many water ecosystems. We develop a model which considers the characteristics of agricultural and municipal nutrient abatement. The model explicitly accounts for the investment needed to set up wastewater treatment facilities, and makes it possible to determine the optimal timing of investment as well as the optimal agricultural and municipal abatement levels. We apply the model to the Finnish coastal waters of the Gulf of Finland. Our results indicate that substantial savings in abatement costs and the damage associated with eutrophication could be obtained by constructing the facilities needed to process all the wastewaters entering the coastal ecosystem. The optimal timing of investment is shown to hinge on both the economic and ecological characteristics of the ecosystem.     

Allocation of pollution abatement under learning by doing

This paper examines how learning by doing affects the allocation of pollution abatement between heterogeneous technologies over time. The optimal policy balances current abatement costs against reductions in future costs and infant technologies may be preferred to mature technologies despite greater initial costs. We characterize when a technological winner might emerge and we identify conditions under which optimal abatement is shared across all technologies. Pigouvian taxes can implement the first-best, but may need to be differentiated across technologies. When technical change is induced, an important role of environmental policies is to put abatement on the right technological trajectories.