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.     

IMPROVING ENVIRONMENTAL POLICY: ARE MARKETS THE SOLUTION?

While market approaches are clearly valuable for improving U.S. environmental policy, they cannot solve all of the problems, and not necessarily the most difficult ones. They can ensure that a given total abatement is achieved at minimum cost. But, if pollution damages depend on how abatement effort is allocated among polluters, this is not necessarily the most desirable outcome. One also needs to be sure that the potential gains from trade implicit in market solutions will actually be realized within some given time; the empirical evidence here is not necessarily promising. Rather than how aggregate abatement should be distributed among polluters, the chief difficulty often lies in determining how much overall abatement is required. A key factor that economists tend to overlook is the difficulty of ascertaining just how benefits vary with abatement effort. Uncertainty and risk aversion in connection with the marginal benefit curve may explain regulatory actions that are otherwise hard to justify.     

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.     

BENEFITS OF PRESERVING OLD-GROWTH FORESTS AND THE SPOTTED OWL

This paper presents results from a national contingent-valuation study of the economic benefits of preserving old-growth forests in the Pacific Northwest. The study elicits "market-like" valuation responses from U.S. households concerning the benefits of a conservation policy for the northern spotted owl. These data provide a basis for estimating the benefits of preservation in terms of average household willingness to pay. Existing cost estimates are used to compute threshold prices that the benefits of the policy must exceed for the policy to be efficient. Benefit/cost ratios are calculated using "best" and "lower-bound" estimates of the benefits of preservation. Under all combinations of assumptions, the estimated benefits exceed the costs of the conservation policy.     

Measuring environmental efficiency of industry: a case study of thermal power generation in India

Technical and environmental efficiency of some coal-fired thermal power plants in India is estimated using a methodology that accounts for firm’s efforts to increase the production of good output and reduce pollution with the given resources and technology. The methodology used is directional output distance function. Estimates of firm-specific shadow prices of pollutants (bad outputs), and elasticity of substitution between good and bad outputs are also obtained. The technical and environmental inefficiency of a representative firm is estimated as 0.06 implying that the thermal power generating industry in Andhra Pradesh state of India could increase production of electricity by 6/ while decreasing generation of pollution by 6%. This result shows that there are incentives or win–win opportunities for the firms to voluntarily comply with the environmental regulation. It is found that there is a significant variation in marginal cost of pollution abatement or shadow prices of bad outputs across the firms and an increasing marginal cost of pollution abatement with respect to pollution reduction by the firms. This result calls for the use of economic instruments like pollution taxes instead of command and control regulation used currently in India to reduce air pollution.

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.     

What is the Best Distribution for Pollution Abatement Efforts? Information for Optimizing the WFD Programs of Measures

The Water Framework Directive (WFD) has mobilized economic theory in order to encourage E.U. Member States to reach desirable environmental water pollution levels by conciliating economic and ecological interests. For this purpose, a stringent standard (“good status”) has been set. Nevertheless, it will be possible to relax this standard if it appears that total abatement costs required for reaching this “good status” exceed expected environmental benefits. This ambitious policy updates the issue of the abatement costs and environmental benefits assessment. Concerning the costs, a full discrimination of the abatement effort minimizes the total cost when the impact of polluters changes spatially, while a uniform effort can reach a pollution target in flexible ways. In this case, the increase of the degree of discrimination of the abatement effort is required only if it generates significant positive economies. Our theoretical and empirical results have shown that the discrimination advantage becomes insignificant for either very demanding or very little demanding ecological standards and varies according to the polluters’ profile. In the case of “intermediate” standards, efficiency gains become negligible with a restricted number of effort “levels”.     

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.     

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.      

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.     

INTRODUCTION OF THE SNA INTO THE OFFICIAL STATISTICS OF THE COMMONWEALTH OF INDEPENDENT STATES

The work on the introduction of the elements of the SNA into the official statistical practice of the former U.S.S.R. began in 1988 when estimates of the GDP using conversion keys were prepared. In 1991 the decision was made to implement the entire SNA gradually on the basis of the international standards. The methodology of compilation of the main accounts was formulated by the Statistical Committcc of the C.I.S. with the assistance of the OECD. It originally drew on the ESA with introduction of elements of the revised SNA and adaption to specific economic processes in the country. It required solution of a number of conceptual and statistical problems referring to the treatment, allocation and valuation of selected activities. The estimates of the main accounts were made for the former U.S.S.R. by sectors and by industries for 1988–90. This project has provided the basis for further work on implementation of the SNA in C.I.S. countries.     

PROBLEMS OF A CENSUS OF NATIONAL WEALTH

This paper is essentially a summary of the book Measuring the Nation's Wealth (Volume 29, Studies in Income and Wealth, New York: National Bureau of Economic Research, 1964), which is the report of study directed by the author. The purpose o f the study was to assess the problems and possibilities of conducting a national census of real wealth as a basis for continuing wealth and balance sheet estimates for the U.S. economy, by major sector.
It is stressed that the balance sheets and wealth estimates should be designed as a consistent part of an integrated system of national income accounts. Thus, valuation (at market prices and/or depreciated replacement costs), sectoring, and type-of-asset detail in the basic data and derived estimates should be compatible with the flow estimates contained in the economic accounts. Consistency of stock and flow estimates facilitates analysis of inter-relationships, and is helpful in the estimation process.
It is recommended that in the U.S. asset data by broad categories be collected as part of the recurring economic censuses and other reporting systems, but that detail on fixed reproducible assets (construction and equipment) at cost, by year or period of acquisition, be obtained from a small sample of respondents in each industry. The detail would be useful in its own right, and also permit revaluation of the assets by use of price indexes and depreciation rates to a current depreciated replacement cost basis. Where feasible, respondent estimates of market values would also be obtained.
The proposal is thus a compromise between the Japanese 1955 sample survey of assets, and the detailed wealth inventory of the U.S.S.R. which was begun in 1959. Preliminary work is now underway in the U.S. federal statistical agencies to expand collection of asset data, and to prepare comprehensive wealth estimates in the framework of the national income accounts.     

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.     

Economic instruments for emission abatement under appreciable technological indivisibilities

The paper explores the performance of decentralized incentives when abatement involves technological indivisibilities. Technologically, pollution abatement is often carried out as a discrete process, if pollution reduction involves relatively large-scale investments in emission abatement equipment.Consequently, the firm's response to decentralized economic incentives for pollution abatement is affected by the indivisible property of the technology. It can be shown that in such cases efficiency may not be realized. Installing an abatement device may entail too much or too little investment compared with the eficient solution.To partially remedy this problem, an incentive scheme which incorporates a fine (penalty) on pollution-induced damages is proposed in this paper. Essentially, as in the case of the command and control approach, the mechanism imposes a fine when firms do not meet an aggregate (e.g., a bubble) emission level. The fine is set as a proportion of the polluting firm's share of the total excess damage inflicted when the standard has been violated. The paper explores alternative outcomes under this scheme in the framework of a non-cooperative game.The outcomes under command and control (uniform percentage reductions), taxes, pollution permits and the fine scheme are illustrated with data from the haifa area in northern Israel. They are compared with the social planner solution in terms of efficiency (achieving a given standard at minimum cost) and the volume of transfer cost.     

Moving to greener pastures? Multinationals and the pollution haven hypothesis

This paper presents evidence on whether multinationals are flocking to developing country “pollution havens”. Although we find some evidence that foreign investors locate in sectors with high levels of air pollution, the evidence is weak at best. We then examine whether foreign firms pollute less than their peers. We find that foreign plants are significantly more energy efficient and use cleaner types of energy. We conclude with an analysis of U.S. outbound investment. Although the pattern of U.S. foreign investment is skewed towards industries with high costs of pollution abatement, the results are not robust across specifications.     

Shadow prices, environmental stringency, and international competitiveness

Empirical tests of the relationship between international competitiveness and the severity of environmental regulations are hampered by the lack of pollution abatement cost data for non-U.S. countries. The theory of the firm suggests that environmental stringency can be measured by the difference between a polluting input's shadow price and its market price. We make a first attempt at quantifying such a measure for two industries located in nine European OECD countries. Overall, we provide (i) a new approach to measure cross-country regulatory differences in that we use a theoretically attractive measure of industry-specific private compliance cost, and (ii) empirical estimates that are an attractive tool for researchers and policymakers who are interested in examining how economic activity is influenced by compliance costs.     

THE IMPACT OF FOREIGN OWNERSHIP AND EFFICIENCY ON POLLUTION ABATEMENT EXPENDITURE BY CHEMICAL PLANTS: SOME UK EVIDENCE

This paper examines the impact of foreign ownership and efficiency on chemical plants' pollution abatement expenditure. The model estimates presented reveal not only which factors are the key determinants of whether any abatement expenditure occurs but also explain how much was spent on the principal categories of pollution control. These chemical plant results present a conspicuous contrast with earlier results based on other industrial sectors. This would suggest that the efficiency–pollution spending relationship is also characterised by industry specific effects.     

DEVELOPMENT OF ESTIMATES OF THE STOCK OF FIXED CAPITAL IN THE UNITED KINGDOM*

The historical background and present methodology used in compiling the U.K. official estimates of the stock of fixed capital are described. Mention is made of the possibility that with the development of commercial accounting direct estimates of capital stock may be derived from enterprise accounts at some future time. For the present, however, an indirect perpetual inventory approach is followed. Some of the deficiencies of the present estimates are discussed including the effects of possible biases in the life-length assumptions, price indices and the treatment of secondhand assets. Estimates of gross capital stock are given analysed by industry group of ownership and by type of asset. Some conceptual issues are discussed in relation to user requirements, including the distinction between the stock of capital and the flow of services from it. The authors conclude that little can be done to improve the perpetual inventory estimate of fixed capital in the U.K. without devoting more resources to the collection and analysis of new information, particularly on the service lives of fixed assets, the extent of leasing and the transfer of assets between industries.     

Environmental cost-benefit analysis of alternative timing strategies in greenhouse gas abatement: A data envelopment analysis approach

Assessing the benefits of climate policies is complicated due to ancillary benefits: abatement of greenhouse gases also reduces local air pollution. The timing of the abatement measures influences both the economic costs and ancillary benefits. This paper conducts efficiency analysis of ten alternative timing strategies, taking into account the ancillary benefits. We apply the approach by Kuosmanen and Kortelainen [Valuing Environmental Factors in Cost-Benefit Analysis Using Data Envelopment Analysis, Ecological Economics 62 (2007), 56-65], which does not require prior valuation of the environmental impacts. The assessment is based on synthetic data from a dynamic applied general equilibrium model calibrated to The Netherlands. Our assessment shows that if one is only interested in GHG abatement at the lowest economic cost, then equal reduction of GHGs over time is preferred. If society is willing to pay a premium for higher ancillary benefits, an early mid-intensive reduction strategy is optimal.     

Valuing Unpaid Child Care in the U.S.: A Prototype Satellite Account Using the American Time Use Survey

This paper builds on previous satellite accounts that treat households as production units, but challenges their measurement and valuation of time devoted to child care, making a case for the inclusion of supervisory child care time that does not overlap with other productive activities. We also suggest several other methodological refinements for estimates based on analysis of data from the American Time Use Survey: application of a vector of specialized replacement cost wage estimates for different child care activities rather than a single wage, and adjustments for the ratio of children to adults present and for the educational attainment of caregivers. Our estimates of the value of child care alone in 2004 and 2010 exceed previous estimates of the value of all non‐market household production in the U.S. The end result is an upward adjustment of Gross Domestic Product by about 43 percent compared to previous adjustments of about 26 percent.