48
E. Romstad
Fig. 4.3. Suppose instead that the regulator issues an emission tax like t″. Then, it is in polluter i’s own interest to adjust
emissions so that the cost-effective solution t″ = MAC i ( z″ i ).
This is one reason why economists are skeptical toward
CAC regulations, and instead prefer emission taxes, subsidies to reduce emissions, or tradable emission quotas. Under
tradable emission permits, polluters with high marginal
abatement costs buy emission right from polluters with low
abatement costs until the emission quota price equals each
polluter’s marginal abatement costs.
Now, we are in a situation where we can proceed and discuss economic optimality. An allocation, Z*, is optimal when
the aggregate marginal abatement cost, MAC( Z*), equals
marginal economic costs, MEC( Z*), where Z* is the sum of
individual polluter emissions.
The reason I emphasize these issues is that if we do not
have cost efficiency, i.e., the equimarginal principle is met,
the resulting aggregate marginal abatement costs will be
higher than necessary. This has profound implications for
the resulting aggregate emission level, and hence also for
the environmental performance of an economy. Figure 4.4
illustrates these points.
Suppose the cheaper policy depicted by MAC 1 ( Z) is
chosen. Then, the emission level where marginal economic
costs, MEC( Z) crosses the marginal abatement cost curve
occurs at the emission level, Z*. Compare that with a situation where the more costly policy, depicted by MAC 2 ( Z)
is chosen. This gives the perceived optimal emission level
Z′ which is higher than Z*. Hence, environmental damages
are higher and there is a welfare loss to society given by
the shaded areas A and B. The figure therefore illustrates the
importance of choosing low-cost policies and helps explain
economists’ “obsession” with low cost.
Economic optimality is also closely linked to the net benefits of policies, i.e., the environmental benefits justify the
costs obtaining these benefits. When economic optimality is
reached, net benefits are maximized. To see this, consider
areas A and D, where the sum of A and D is the increase in
environmental benefits while area D is the added cost from
lowering emissions from Z′ to Z*. Hence, net benefits from
the low-cost policies always exceed the additional costs. In
addition, there is the extra cost savings moving from the
high- to the low-cost policy illustrated by area B.
A final word of caution: while the low-cost policy is
cheaper than the high-cost policy for the same emission level,
Z′, total costs of the low-cost policy may exceed those of the
high-cost policy as emissions are further reduced under the
low-cost policy. Whether this takes place or not depends on
the size of the cost savings of the low-cost policy for reducing emissions to Z′ (area B) relative to the additional costs of
further reductions in emissions from Z′ to Z* (area D).
4.4 Nonpoint Source Pollution in an
Economic Context
Unfortunately, nonpoint source emissions do not fit the standard economic framework of controlling emissions because
it is technically difficult and costly to measure emissions
from individual farm fields. Such measurement costs, frequently termed transaction costs, are to be included in the
calculation of the social costs of abatement. This increases
the costs of emission-based policies for nonpoint source
emissions, and has led economists to consider other regulatory approaches that can replace emission-based policies: (1)
procedural regulations, where farmers are instructed or induced to adopt certain practices and (2) input-based regulations, where the focus is on reducing use of inputs perceived
to contribute to unwanted emissions. In his optimal point
of instrument application (OPIA) framework, Vatn (2005)
groups the desirability of various regulatory approaches according to their transaction costs and degree of emission homogeneity. This is illustrated in Fig. 4.5.
The dividing lines between these three types of regulation
should be seen as indications, not absolutes. Despite this,
the main issue in the figure—emissions regulations only
fit a small spectrum of problems—remain. For economists,
this is quite troublesome. Compared to input or procedural
Fig. 4.4 Low-cost policies yield welfare gains and improve environmental performance
Fig. 4.3 Equal emissions are not cost-effective when marginal abatement costs differ across polluters
E. Romstad
Fig. 4.3. Suppose instead that the regulator issues an emission tax like t″. Then, it is in polluter i’s own interest to adjust
emissions so that the cost-effective solution t″ = MAC i ( z″ i ).
This is one reason why economists are skeptical toward
CAC regulations, and instead prefer emission taxes, subsidies to reduce emissions, or tradable emission quotas. Under
tradable emission permits, polluters with high marginal
abatement costs buy emission right from polluters with low
abatement costs until the emission quota price equals each
polluter’s marginal abatement costs.
Now, we are in a situation where we can proceed and discuss economic optimality. An allocation, Z*, is optimal when
the aggregate marginal abatement cost, MAC( Z*), equals
marginal economic costs, MEC( Z*), where Z* is the sum of
individual polluter emissions.
The reason I emphasize these issues is that if we do not
have cost efficiency, i.e., the equimarginal principle is met,
the resulting aggregate marginal abatement costs will be
higher than necessary. This has profound implications for
the resulting aggregate emission level, and hence also for
the environmental performance of an economy. Figure 4.4
illustrates these points.
Suppose the cheaper policy depicted by MAC 1 ( Z) is
chosen. Then, the emission level where marginal economic
costs, MEC( Z) crosses the marginal abatement cost curve
occurs at the emission level, Z*. Compare that with a situation where the more costly policy, depicted by MAC 2 ( Z)
is chosen. This gives the perceived optimal emission level
Z′ which is higher than Z*. Hence, environmental damages
are higher and there is a welfare loss to society given by
the shaded areas A and B. The figure therefore illustrates the
importance of choosing low-cost policies and helps explain
economists’ “obsession” with low cost.
Economic optimality is also closely linked to the net benefits of policies, i.e., the environmental benefits justify the
costs obtaining these benefits. When economic optimality is
reached, net benefits are maximized. To see this, consider
areas A and D, where the sum of A and D is the increase in
environmental benefits while area D is the added cost from
lowering emissions from Z′ to Z*. Hence, net benefits from
the low-cost policies always exceed the additional costs. In
addition, there is the extra cost savings moving from the
high- to the low-cost policy illustrated by area B.
A final word of caution: while the low-cost policy is
cheaper than the high-cost policy for the same emission level,
Z′, total costs of the low-cost policy may exceed those of the
high-cost policy as emissions are further reduced under the
low-cost policy. Whether this takes place or not depends on
the size of the cost savings of the low-cost policy for reducing emissions to Z′ (area B) relative to the additional costs of
further reductions in emissions from Z′ to Z* (area D).
4.4 Nonpoint Source Pollution in an
Economic Context
Unfortunately, nonpoint source emissions do not fit the standard economic framework of controlling emissions because
it is technically difficult and costly to measure emissions
from individual farm fields. Such measurement costs, frequently termed transaction costs, are to be included in the
calculation of the social costs of abatement. This increases
the costs of emission-based policies for nonpoint source
emissions, and has led economists to consider other regulatory approaches that can replace emission-based policies: (1)
procedural regulations, where farmers are instructed or induced to adopt certain practices and (2) input-based regulations, where the focus is on reducing use of inputs perceived
to contribute to unwanted emissions. In his optimal point
of instrument application (OPIA) framework, Vatn (2005)
groups the desirability of various regulatory approaches according to their transaction costs and degree of emission homogeneity. This is illustrated in Fig. 4.5.
The dividing lines between these three types of regulation
should be seen as indications, not absolutes. Despite this,
the main issue in the figure—emissions regulations only
fit a small spectrum of problems—remain. For economists,
this is quite troublesome. Compared to input or procedural
Fig. 4.4 Low-cost policies yield welfare gains and improve environmental performance
Fig. 4.3 Equal emissions are not cost-effective when marginal abatement costs differ across polluters