chapter 6 pollution control: instruments. 5 101535 40 302520 pollution abatement, z z mc a = 3z...
TRANSCRIPT
CHAPTER 6
Pollution control: instruments
5
10 15 35 40302520
Pollution abatement, Z
Z
MCA = 3ZA
MC
MCB = 3ZB
75
100
200
Figure 6.1 Marginal abatement cost functions for the two firms
Figure 6.2 Expected damages, reducing as the amount of precaution taken, Q, increases
Expected damages
The amount of precaution taken, Q
B(Q)
C(Q)
MB(Q)
MC(Q)
Q*
Q*
Precaution, Q
Precaution, Q
Figure 6.3
The socially efficient level of precautionary behaviour
The level of precaution applied is socially efficient when the net benefit (B – C) from precaution is maximised. This is shown at Q = Q*. Note that the slopes of the B and C functions are equalised at this point. Hence, as shown in the lower half of the graphic, the marginal quantities are equated. That is, the marginal benefit of precaution and the marginal cost of precaution are equal at the socially efficient level of precaution, Q*. That is, MB(Q*) = MC(Q*).
Location of emissions
Ambient pollution levels
Emissions output
Production technique
Inputs used
Quantity of goods produced
Figure 6.4a The pollution process
Zoning
Ambient pollution requirements
Emissions licenses
Technology controls
Input restrictions
Output quotas
Figure 6.4b Command and control instruments
Figure 6.5 An economically efficient emissions tax
0 Z* = *MM̂ Z
M̂
Emissions abatement, Z
*
Marginal benefit (before tax)
0
*
Marginal benefit (after tax)
M* Emissions, M
Marginal damage
Marginal cost of abatement
Marginal benefit of abatement
Figure 6.6 The economically efficient level of emissions abatement
M̂
Pre-tax or pre-subsidy marginal benefit
0
Emissions, M
Figure 6.7 Emissions tax and abatement subsidy schemes when marginal damage is unknown, or when a target is being set on grounds other than economic efficiency
Post-tax or post-subsidy marginal benefit
M~. .
μ~ .
Suppose that the EPA does not have sufficient information to deduce the economically efficient level of emissions, or it wishes to set an overall emissions target on some other basis. Figure 6.7 makes it clear that to attain ANY specific emissions target using a tax or subsidy instrument, knowledge of the aggregate (pre-tax or pre-subsidy) marginal benefit of emissions function would be sufficient.
M̂
Pre-tax or pre-subsidy marginal benefit
0
*
M* Emissions, M
Marginal damage
Figure 6.8 Emissions tax and abatement subsidy schemes: a comparison
S3 S4S6 S2
S1S5
Post-tax or post-subsidy marginal benefit
An emissions tax and an emissions abatement subsidy (at the same rate) differ in terms of the distribution of gains and losses. This has important implications for the political acceptability and the political feasibility of the instruments. It also could affect the long-run level of pollution abatement under some circumstances, via alteration of the size of the industry.
Figure 6.9 The determination of the market price of emissions permits
Auctioned permits case
Marginal abatement cost (aggregate)
*
M̂M* Emissions, M
0
Fixed supply of permits
A firm will bid to purchase an additional emissions permit whenever the marginal cost of abating emissions exceeds the permit price. The market equilibrium permit price is determined by the value of the aggregate marginal abatement cost at the level of abatement implied by the total number of issued permits.
Demand for permits
*
EP* Emission permits (EP)
0
Figure 6.10 The determination of the market price of emissions permits: free initial allocation case
Supply of permits
Figure 6.11: Efficient abatement with two firms and marketable permits
0
20
40
60
80
100
120
140
160
180
200
0 5 10 15 20 25 30 35 40 45 50
Emissions abatement, Z
Mar
gin
al a
bat
emen
t co
st
MC(B)
MC(A)
MC(INDUSTRY)
Required industry wide abatement
Equilibrium permit price = Marginal abatement cost for each firm = 75
Under tradable permit schemes, in equilibrium marginal abatement costs will be equal over all firms. Hence marketable permits, like taxes and subsidies, achieve any given target at least cost. Moreover, if the total quantity of permits issued is M* and that quantity is identical to the level of emissions which would emerge from an emissions tax (or an abatement subsidy) at the rate * then a marketable permit scheme will generate an equilibrium permit price *.
.4
.2
.5
.1
.6
.3
Firm 3, one of six controlled large power station sources of CO2
Controlled sector
Figure 6.12.a A ‘cap and trade’ permit system
.A .4
.2
.5
.1
.6
.3
Firm 3, one of six controlled large power station sources of CO2
Controlled sector
Figure 6.12.b A flexible permit system with offsets
Uncontrolled sectors (of other CO2 emitters)
.A
.B
.C
.D
MC1
MC2
£
0 Emissions abatement, ZZ1*
Figure 6.13 Dynamic incentives under emissions tax controls
Z2*
•
•
2*ii
*iiii MδMβαC
Ci
i
i*i M̂M 0M*
i *iM
Figure 6.14 The firm’s abatement cost function.