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ECB2EPS – Economics of the public sector ILVA MISMANAGEMENT
ANALYSIS OF ILVA, A CASE STUDY: THE SOCIO-ECONOMIC IMPLICATIONS OF
NEGATIVE EXTERNALITIES IN THE AREA OF TARANTO, ITALY
1. INTRODUCTION
ILVA is an historical Italian joint-stock company that works in the sector of iron and steel.1 The
most important plant in Italy is located in Taranto (Apulia) and it is the largest steel plant in
Europe.2 Formerly known as Italsider, it was privatized in 1995 due to the crisis in the iron and
steel sector as a result of the acquisition by the Italian steel producer Gruppo Riva before being
run in extraordinary administrative procedure3 in 2015.4 Following the privatization, the Italian
government has failed to monitor and control the negative impact of ILVA on the environment,
revealing the difficulties in managing industrial performance with respect to the quality of the
environment and human health.5 Nowadays, an inquiry is still being conducted by the judicial
authority and ILVA’s Management Board is under investigation on suspicion of manslaughter
and arson, poisoning of foodstuffs, willful omission of precautions against accidents at work,
aggravated damage to public property, jet and spillage of hazardous substances and air
pollution.6 The complexity of the ILVA situation does not involve only an environmental crime,
but it also has a social impact in terms of employment7. Unlike the problem, our questions here
seem clear and straightforward: what could the government do to avoid this kind of issues and
damages to people and for the environment? Which social, environmental and economic benefits
could have been achieved arising from avoiding this disaster?
We will deal with ILVA’s case study by comparing both Italian laws concerning negative
externalities and the European regulations and directives with the current chemical and
epidemiological surveys with the purpose of an economic analysis of the possible benefits.
1 Tonelli, F., Short, S.W., Taticchi, P. (2013).2 Faris, S. (2012).3 The extraordinary administrative procedure, regulated by the Italian Legislative Decree n. 270 of 8 July 1999, is applied to businesses in insolvency state with preservative purpose, not with liquidation one.4 Carrubba, C., Gnudi, P., Laghi, E. (2015).5 ARPA Agenzia Regionale per la Protezione dell’Ambiente dell’Emilia-Romagna (2012).6 Decree of 25 July 2012 of the judge for preliminary investigations at the Court of Taranto.7 Lucifora, A., Bianco, F., Vagliasindi, G.M. (2015).
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Furthermore, we will investigate on one particular case from the US Superfund Sites to find out
how Italian government can intervene on ILVA’s issue by understanding how different
governments tackled similar cases of industrial pollution-related issues.
The theoretical framework will be structured in the following way: first, an historical background
of the ILVA to better understand the role of Italian and European laws; second, an introduction
to the market failure including the implications that led to negative externalities and an overview
of the relevant European directives and Italian laws in the matter of pollution; third, the impact
of negative externalities on relevant socio-economic fields; fourth, brief description of the case
of Woburn (Massachusetts), similarities with the case of ILVA and possible solutions.
2. HISTORICAL BACKGROUND
ILVA's disaster has his roots in 1905, year of the foundation of the homonymous public
company, established for the purpose of industrialization development of in the South of Italy:
the support of the Italian government ensured the supply of iron and steel at subsidized rate and
protection of company from foreign competition due to tariff barriers.8 After being managed by
the Istituto per la Ricostruzione Industriale9 (IRI) and then by Finsider, in 1965 the IV Steel Mill
of Taranto, set to be the largest steel plant in Europe, was inaugurated.10 Due to the crisis in the
steel sector, Italsider11 was voluntarily liquidated and acquainted by Gruppo Riva, that in 1995
completed the process of privatization changing the nature of the business into profit-oriented.12
The Gruppo Riva is currently the 1st steel producer in Italy, 5th in Europe and 46th in the world,
consisting of 20 production sites in 6 different countries in the world.13 Nowadays, ILVA is
composed of 16 different steel plants, located in Taranto (Apulia), Genoa (Liguria), Novi Ligure
and Racconigi (Piedmont), Marghera (Veneto), Patrica (Lazio) and 3 in France.14 In 2012,
following the publication of the chemical and epidemiological surveys, the redevelopment of the
8 Krugman, P.F., Obstfeld, M., Melitz, M.J. (2014).9 English: Institute for Industrial Reconstruction.10 Pennuzzi, M. (2001).11 Nuova Italsider was the name of ILVA since the acquisition by Finsider in 1949, it was renamed back ILVA only in 1988.12 Affinito, M., De Cecco, M., Dringoli, A. (2000).13 Gruppo Riva (2014).14 ILVA (2015).
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steel plant located in Taranto started as part of the Integrated Pollution Prevention and Control
(IPPC).15 In 2013 the Italian government ratified a legislative decree which agreed upon the
compulsory administration of ILVA and the subsequent extraordinary administrative procedure
in 2015.
3. INTRODUCTORY ANALYSIS TO THE MARKET FAILURE
Since 1960, year of the beginning of the IV Steel Mill of Taranto’s construction, ILVA sowed
the seeds of an unavoidable future disaster. It is possible to recognize at least four different
reasons that led to the ongoing market failure that involved both the Italian government and the
company itself: the location of the plant, the inadequate management of the issue by the Italian
government, the inappropriate ownership of the company, the lack of European directives
implementation.16
The ILVA plant of Taranto is located in proximity of the district of Tamburi, inhabited by
around 18.000 people.17 Its position does not only influence the residential area, but also the
marine area and the surrounding soil (as in Figure 1).18
15 Ministry of the Environment and Protection of Land and Sea (2012).16 Legal framework provided by Vagliasindi, M.G., Gerstetter, C. (2015).17 ARPA Agenzia Regionale per la Protezione dell’Ambiente dell’Emilia-Romagna (2012).18 Cardellicchio, N. (2012).
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Figure 1 - Area of the polluted site in the province of Taranto
ECB2EPS – Economics of the public sector ILVA MISMANAGEMENT
The Italian government decided to build the new plant in Taranto due to the worsening of the
industrial and occupational crisis in the South of Italy: this decision, initially opposed by the IRI,
required an expansion of the plant in 1970 without taking into account its location and the
subsequent environmental risks for the Ionic area. After years of inactivity, the Italian
government recognized ILVA as a plant of national strategic interest and authorized the
continuation of the industrial activity19 despite chemical and epidemiological surveys showed
that such activity was detrimental to the health of citizens of the city of Taranto.20 Any fee or
additional seizures had been applied so far.
Since the privatization of ILVA in 1995, the production of steel was enhanced from 8.5 million
tons/year to 11.5 million tons/year. On the other hand, the environmental impact was not
improved, a decree21 was issued to ensure the adoption of environmental and sanitary protection
in compliance with the IPPC permit.
Italy has failed to meet the EU requirements regarding the pollutant emissions of ILVA, that did
not comply with environmental standards. Despite the infringement proceedings of the European
Commission ongoing since 2013 for the aforementioned reasons, the Commission itself is
conducting an inquiry to assess a potential violation of the EU state aid rules with regard to
Italian financing to ILVA.22
4. FRAMEWORK OF THE IMPACTS OF ILVA EMISSIONS
4.1 Environmental impact
The IV Steel Mill of Taranto emitted throughout years of activity significant quantities of
pollutants23 stemming from the production process that consisted of 4,159.3 tons of dust,
11,056.9 tons of nitrogen dioxide (NO2), 11,343.2 tons of sulfur dioxide (SO2), 7 tons of
hydrochloric acid (HCl), 1.3 tons of benzene (C6H6), 335.5 kg of polycyclic aromatic
19 Law Decree n. 207 of 3 December 2012, converted with modifications into law n. 231 of 24 December 2012; commonly known as “Decreto Salva-ILVA” (English: Save-ILVA Decree).20 Pascucci, P. (2013).21 Law Decree n. 61 of 4 June 2013, converted with modifications into Law n. 89 of 3 August 2013.22 European Commission Press Release of 20 January 2016.23 The values are expressed on annual basis.
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hydrocarbon (PAH), 52.5 g of benzo[a]pyrene (C20H12) and 14.9 g of polychlorinated
dibenzodioxins (PCDD/F) and polychlorinated biphenyl (PCBdl) and 280 kg of chromium III
(Cr).24 Those pollutants are present in the atmosphere as particulate matter (PMx)25 and they show
an higher concentration in proximity of the plant and the surrounding territory, along with a
positive correlation with dangerous effect for the health and for the agriculture.
The chemical survey is the result of a production process that has capacity of 20 million tons of
raw material, including 11.5 million tons of steel, representing the 40% of the total Italian supply
of steel.26 Due to implementations of the production system with the Best Available Techniques
(BAT) to limit the environmental impact,27 the steel supplied by ILVA dropped to 4.7 million
tons28, but still plays a key role in terms of employment in the Southern Italy and the Italian
supply of steel. Best Available Techniques (BAT) means the available techniques, including both
the technology used and the way your installation is designed, built, maintained, operated and
decommissioned, which are the best for preventing or minimizing emissions and impacts on the
environment.29 BAT legally refers to BAT Reference Documents (BREFs) that have been
adopted under both the European Integrated Pollution Prevention and Control Bureau (IPPC)
Directive30 and the Industrial Emissions Directive (IED).31 Although the decrease in production
is significantly high, it assumes a considerable importance also the effect that this event has on
the pollutant emissions, resulting in a drastic reduction with the implementation of the BAT and
the IPPC directives (see Table 1).32
24 Sanna, M., Monguzzi, R., Santilli, L., Felici, R. (2012).25 “x” refers to the dimension of the particles in m. 26 Meneghello, M. (2013).27 Pirro, F. (2009).28 ILVA (2016).29 United Kingdom Environment Agency (2016).30 Directive 2008/1/EC.31 Directive 2010/75/EU.32 ARPA Agenzia Regionale per la Protezione dell?Ambiente della Puglia (2013).
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Table 1: Emissions scenario before (2010) and after (2016) IPPC implementation
Pollutant ILVA Channeled Emissions ILVA Hot Area Emissions Other ILVA Emissions Unit of Measurement
2010 2016 Variation % 2010 2016 Variation % 2010 2016 Variation %
Bap 76.0 69.2 -9% 178.4 125.5 -30% kg/yearNaphthalene 853.6 568.8 -33% 4,267.1 3,002.6 -30% kg/year
As 1,536.2 1,168.1 -24% 50.1 36.4 -27% 26.0 2.6 -90% kg/yearNi 893.6 938.2 5% 183.7 132.5 -28% 1,479.4 147.9 -90% kg/yearCd 1,336.5 1,273.4 -5% 74.6 54.4 -27% 20.1 2.0 -90% kg/yearPb 39,474.0 36,417.4 -8% 549.1 400.0 -27% 364.0 36.4 -90% kg/yearSe 478.7 351.3 -27% 544.2 397.2 -27% 6.7 0.7 -90% kg/year
Cr (VI) 11.0 12.7 15% kg/yearBenzene 142.2 163.4 15% 10.8 10.6 -2% tons/year
PCB 49.5 46.3 -6% kg/yearPCDD/F 38.9 22.1 -43% 0.7 0.4 -42% g/year
4.2 Health impact
The presence of the aforementioned pollutants in the atmosphere translates in a scientific
evidence of negative impact on human health: in particular, the exposure to such environmental
pollutants displays acute effects (short-term exposure) and chronic effects (long-term exposure).
According to the results of the epidemiological survey of 2012, it is possible to assert, as a result
of prolonged exposure to the pollutants, that a strong and consolidated scientific evidence exists
in relation to the carcinogenic effect for human health, and that a suggestive scientific evidence
exists in relation to degenerative pathologies. In the seven years (2004-2010) considered in the
survey, the following results were observed: a total of 11,550 deaths (on average, 1,650 per year)
for cardiovascular and respiratory causes; a total of 26,999 hospitalizations (on average, 3,857
per year) for cardiovascular, respiratory and cerebrovascular causes. Considering only the
districts closer to the steel plant, in particular Tamburi, Borgo and Paolo VI, the following results
were observed: a total of 637 deaths (on average, 91 per year); a total of 4,536 hospitalizations
(on average, 648 per year). The critical sanitary situation in Taranto is better explained by the
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mortality and hospitalization profile in Taranto that exhibits a significant increase in percentage
(see Table 2)33 of overall mortality with all cancer causes; in particular, the analysis of
SENTIERI Project displayed that the excess of overall mortality in Taranto was between 10%-
15% above the regional average for all cancer causes.34
Table 2: Percentage increase in mortality and hospitalization in three districts in Taranto (compared with the others)
Cause of death Males Females
District Tamburi Borgo Paolo VI Tamburi Borgo Paolo VI
% % % % % %
All causes +12 +7 +27 +9 +1 +28
Natural causes +3 +3 +35 +5 +28
Malignant tumor +11 0 +42 +23
Cardiovascular diseases +10 +2 +28 +15
Cardiac diseases +9 +3 +27 +24 +4 +22
Cardiac ischemia +20 +4 +37 +46 +2 +15
Respiratory diseases +8 +5 +64 +9 +9 +26
33 Forastiere, F., Biggeri, A., Triassi, M. (2012).34 Pirastu, R., Iavarone, I., Pasetto, R., Zona, A., Comba, P. (2014).
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4.3 Economic impact
The impact of the pollutant particles in the environment, in the broad sense of the term, is not
only limited to the atmosphere: the chemical-physical characteristics of those pollutants, in
particular PCDD and PCB (Figure 2 and 3)35, enables the contamination of the agricultural soil
and the aquatic environment, resulting in a bioaccumulation in the food chain.36 This event
resulted in a huge impact for the local agriculture and livestock farming. Starting from 2008, a
ban was imposed in growing crops and pasturing over wastelands within 20 km from the ILVA
steel plant, while almost than 3,000 sheep and cows were slaughtered for levels of dioxins above
the limit, along with a ban for meat consumption.37
35 ARPA Agenzia Regionale per la Protezione dell’Ambiente della Puglia (2013).36 Pascuzzi, S., Russo, G., Mugnozza, G. S., Verdiani, G., Lagattolla, G. (2013).37 Esposito, V., Maffei, A., Ficoccelli, F., Spartera, R., Giua, R., Assennato, G. (2012).
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ILVA steel plant in Taranto is one of the biggest employers in the Southern Italy, counting
15,487 people directly employed while other 10,000 people are employed form satellite
activities. The role that this business has for Italy emerges not only at the national economic
level, but has even crucial implications at the regional level: in terms of employment, Apulia is
the Italian region that has the highest unemployment rate with respect to the other regions,
amounting to 21.5%; in terms of GDP, it provides to more than 75% of the regional GDP. It
appears clear that Italy will never allow ILVA to fail, making it by definition a “too-big-to-fail”
business.
All the above mentioned environmental impacts had a particular effect in exports, resulting in a
loss of $4.5 billion, along with $10 billions of GDP lost and $2 billions of investments cancelled.
Also the local tourism had to face the environmental crisis that gave rise to trials from local hotel
groups against ILVA and ARPA Puglia.
5. ANALYSIS OF THE MARKET FAILURE
When the environment and natural resources are involved in a market transaction, it is plausible
that a market failure arises due to the presence of negative externalities. An externality exists
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Figure 2 – Map of the average annual concentration of PCDD in 2010
Figure 3 – Map of the average annual concentration of PCB in 2010
ECB2EPS – Economics of the public sector ILVA MISMANAGEMENT
whenever the welfare of some agent depends not only on his or her activities, but also on
activities under the control of some other agent. In the ILVA case the negative externality is the
scourge of the Taranto environmental landscape as well as the health of all the inhabitants: with a
conjunctive intervention by the local and national government this disaster could have been
avoided.
Figure 4 – Analysis of the market for steel
The blue marginal cost line (MCp) intersecting with the demand line (D) shows the optimal
quantity and price at which metal was produced (Figure 4)38: however, the optimality principle
does not imply sustainability to an environmental level. Due to a various amount of subsidies and
preferential treatment, ILVA’s marginal cost of production reached minimum levels leading to
an optimal quantity produced far higher than the normal; due to the low marginal costs too much
metal was produced, which was not a sustainable solution for the environment. With an
intervention by the national and local government aimed at increasing marginal cost of
production, normal output levels would have been restored. This could have been achieved by
the introduction of a tax: the marginal cost line shifts to the left (MCs), representing the increase
38 Tietenberg, T., Lewis, L. (2015).
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in cost induced by the tax. An increase in marginal costs, as for example a tax on pollution,
would have slowed down production by increasing costs and, thus, decreasing quantity
produced, leading to an efficient and sustainable equilibrium.
However, the situation developed in a much different way (Figure 5).39
Figure 5 – Analysis of the market for steel revisited
This situation depicts perfectly how the government dealt with the problem, leading to the
discovery of the second market failure: rent seeking, the use of resources in lobbying and other
activities directed at securing protective legislation. Instead of taxing the company, the
government helped ILVA with subsidies assigned by the European committee, that should have
been used to improve production methods in order to decrease the impact of production on the
environment, giving ILVA a significant advantage over other companies in terms of production
costs. The subsidy shifts the MCp with government subsidies curve to the right, decreasing the
costs and increasing production to a non-sustainable quantity. The triangle A depicts the
deadweight loss due to the tax, but with the subsidy the deadweight area extends to B+C
increasing overall costs to society.
39 Tietenberg, T., Lewis, L. (2015).
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It can be argued that the supply by the government of excessive subsidies distorted competition
giving ILVA an “illegal” advantage over other companies, allowing it to earn monopoly profits
creating another market disruption, but with this paper we will not dig that far.
6. COMPARISON WITH A SIMILAR CASE: THE WOBURN CASE
In order to further understand to what extent the Italian government failed to deal with the issue,
and in particular which kinds of measures can be implemented, we analyzed the case of Woburn,
Massachusetts: this case examines the incidence of leukemia above infant population in Woburn
as a result of water contamination.
Between 1969 and 1986, 21 cases of leukemia were diagnosed among the Woburn children
population, arousing suspicion of the locals due to the far higher rate of diagnosis cases with
respect to the national average.40 The case gained national attention, and after further
investigations by the federal authorities two companies were found liable for the disaster:
Beatrice Food, Inc. and W.R. Grace and Company. However, after 79 days of mostly technical
testimony from expert witnesses hired by all three parties, the accusing and both the defendant,
the six-members jury visited Woburn on July 1982. The jury deliberated for nine days and found
W.R. Grace liable and Beatrice Foods not liable of contaminating the sites.
40 Knorr, R. S., Condon, S. (2002).
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Up to the 1960s Woburn water source was composed by 6 wells all located in rural areas.
However, due to population growth, water demand increased and new sources to satisfy the
increased demand had to be found. Two new wells were opened, referred to as G and H. Wells G
and H were located in east Woburn in the vicinity of the Aberjona River (Figure 6).41 Long ago
the Aberjona River had been a large river that ran through a valley that had been formed by
glaciers. Slowly, over many years, the valley gradually filled with sand, gravel, and silt; the
Aberjona River was slowly reduced to a meandering stream, but the ancient valley below, which
was now filled with gravel and porous dirt, had become an underground water reservoir. At the
surface there were now
marshlands, swamps, and
wetlands. Unfortunately,
much of the industrial
activity was located in this
area as well, including the
W.R. Grace Cryovac
Division, Unifirst (a
uniform dry cleaning
company), and the Riley
Tannery, which was
purchased by Beatrice
Foods in 1978. The Fifteen
Acres shown on the aerial
photograph (Figure 6)
were a parcel of land purchased by the Riley tannery in 1951; during the 1950s and 1960s this
plot of land was used to dump waste from the tannery, including chemicals such as
trichloroethylene (TCE).42 Due to the vicinity of the dumping area to both wells, contamination
was inevitable. Government intervention did not wait to strike: W.R. Grace and Company was
filed $68 million in clean-up costs, with the aim of making Woburn water potable again in the
vicinity of the next 50 years. The estimations of the total benefit coming from the cleanup of the
41 EPA United States Environmental Protection Agency (2016).42 Heneghan, A., K. (2000).
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Figure 6 – Geographical representation of East Woburn & important elements
ECB2EPS – Economics of the public sector ILVA MISMANAGEMENT
area amounts $150 million, but it does not take into account benefits to commercial property or
new uses of the neighboring industries.43
This is a clear case of negative externality caused by mismanagement of toxic waste: due to its
nature and consequences, the Woburn case can be adapted to the ILVA case depicted above.
Although the different approaches that each government undertook are blatant, some differences
are worth pointing out: The United States appointed a federal law, called Superfund or
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) designed
to clean up sites containing hazardous or other production wastes. This act gives rights to a
federal agency, Environmental Protection Agency (EPA), to intervene and oversee the outgoing
of the disaster. In Italy the government tried to overcome the problem by creating the Agenzia
Regionale per la Protezione dell’Ambiente (ARPA)44, controlled by the Italian public authority
but managed by regional authorities: it has specific tasks that include prevention and control,
monitoring of the environmental status, biochemical controls, investigation, promotions,
development and innovation relatively to a definite bundle of environmental themes.45 However,
ARPA differs from the EPA because the first one intervenes on the issue through the mediation
of a distinct institutional entity, meaning that a direct intervention is not provided. The nature of
the disasters is also very different: in the ILVA case, although output levels were not sustainable
even without subsidies, the situation dramatically worsened with the presence of the government,
leading to a government failure, while in the American case it was not a matter of production
control but of waste management.
After analyzing the Woburn case it is even clearer how a proper government intervention should
take place, but it also highlights the serious failures taking place in the Italian government as a
result of decades of public mismanagement, corruption and absence of predominant leaders.
43 Kiel, K., Zabel, J. E. (2001).44 English: Environmental Protection Regional Agency.45 The activites relative to the specific environmental themes performed by ARPA are regulated by deliberations of regional council.
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7. POLICY SUGGESTIONS
This section addresses three different kinds of policy suggestions on negative externalities,
aimed at presenting a framework of plausible measures that the Italian government could
undertake in order to prevent, or at least to limit, the effect of the emissions of ILVA to the
environment. The analysis of the policy suggestions will be carried out in the following order:
The Pigouvian tax, the emission fee and the Cap-and-Trade scheme.
The Pigouvian tax is a tax levied on each unit of an externality-generator’s output in an amount
equal to the marginal damage at the efficient level of output, that simply shifts up the marginal
cost curve, due to an increase equal to the tax, increasing the price faced by the producer. This
policy pushes the producer to set his production where marginal benefit equals marginal cost, an
efficient production, so lowering outputs.
Figure 7 – Analysis of a Pigouvian tax
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The hypothetical firm (Figure 7) has to make payments both to the supplier of his inputs at
Marginal Private Cost (MPC) and to the government for an amount equal to the shift made by
the MPC. Due to the shift of the MPC, now the quantity and the price are at an efficient level, the
point where the MPC+tax and the Marginal Social Cost (MSC) cross each other. The revenues
collected by the government are represented by the rectangle with height equal to the difference
between Pe and Pm and length equal to the distance between the Pm and Qe. A problem with the
Pigouvian tax is that it doesn’t give the incentives to find other ways to reduce pollution than
lowering output.
The emission fee is a tax levied on each unit of pollution, so, in order to reduce pollution, the
producer has not only to consider carefully the lowering of outputs, but also the renewal of his
machines and his plant. Furthermore, the emission fee is cost effective in the sense that induces
each polluter to reduce pollution up to the point where the marginal cost of reducing equals the
level of the fee, resulting in an equal marginal cost across polluters.
Figure 8 – Analysis of an emission fee
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The hypothetical firm incurs a cost of Marginal Damage (MD) for each unit it reduces emissions
(Figure 8). The point P* indicates that emission fee due to which a hypothetical firm will keep on
reducing the pollution, reaching consequently the efficient point E. The reason why the firm will
reduce the pollution is because P*>MD (the x-axis indicates the pollution reduction). At the
efficient point the emission fee is equal to MD, so the firm has no incentives to move from the
equilibrium because moving from it means facing higher MD, if it wants to reduce more the
pollution, or the emission fee despite the lower MD.
The Cap-and-Trade is a policy of granting permits to pollute; the number of permits is set at the
desired pollution level, and polluters may trade the permits.
Figure 9 – Analysis of a Cap-and-Trade system
One firm is an “old plant” with outdated equipment and technology and, therefore, has high
marginal abatement costs, or the cost to reduce pollution; the old plant’s high marginal
abatement cost curve goes from right to left with abatement. The other firm, which will be
simply called the “new plant”, has newer equipment and, therefore, has lower abatement costs;
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the new plant’s low marginal abatement cost curve that goes left to right with abatement (Figure
9). The width of the horizontal axis is the abatement that must be achieved to reduce overall
greenhouse gas emissions to the efficient level. The intersection of the high marginal abatement
cost curve and the low marginal abatement cost curve is where economic efficiency is achieved.
The total costs of achieving the efficient emissions abatement level is: X + Y + Z. The efficient
emissions level, E*, shows that the low marginal abatement cost firm should reduce more
emissions than the high marginal abatement cost firm. Another way to achieve this level of
abatement is to set a carbon cap by issuing carbon permits to polluting firms: each permit gives
the firm the right to emit one metric ton of carbon dioxide equivalent (CO2). If the government
does not have the will to go ahead and give more permits to the high cost firm in order to achieve
efficiency, it is possible to solve the issue by giving each firm the same amount of permits,
represented by the vertical "cap" line. The abatement cost to the low marginal abatement cost
firm is equal to area X. The abatement cost to the high marginal abatement cost firm is W + Y +
Z. At some point the high marginal abatement cost firm might choose to purchase a permit rather
than paying high abatement costs. If the high marginal abatement cost firm recognizes that its
marginal abatement cost is higher than the marginal abatement cost of the low cost firm, they
may choose to propose a trade. In effect, the purple line over the area W + Y is a demand curve
for permits and the green line is a supply curve for permits. Anywhere in between the purple and
green line and within the boundaries of the “cap” line and E* is a permit price that is mutually
agreeable between both firms. Trading reduces overall abatement costs by area W.46
8. CONLUSIONS
Considering all the analysis carried out above, it appears to be straightforward that the ILVA of
Taranto represents one of the biggest unsolved environmental problems that harms, directly and
indirectly, Italy and its economy due to negative externalities: to give a broader view of the issue
in its entirety, in the past years the European Commission drew its attention to the matter and it
is constantly requiring Italy to be actively involved in the reduction of such emissions.
On the other hand, thanks to the economic analysis, ILVA represents a case of a “too-big-to-fail”
firm, worsening the Italian government’s position in terms of action. In fact, we provided in the
46 Rosen, H. S., Gayer, T. (2014).
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previous section a framework containing possible policy suggestions that can be applied to
overcome the problem in order to benefit both the Italian economy and its environment.
In conclusion, it is broadly recognized that the matrix of the problem has both political and
managerial explanations, but history thought to all of us that it is possible to learn from previous
mistakes and, even though the issue by itself also caused, and it is still causing, many innocent
victims, there is still room for improvements that can lead to a Pareto efficient (and socially fair)
allocation of resources that, as the previous section suggests, benefits the Italian economy in its
entirety, starting from the financial to the environmental one, hoping that future choices will not
harm anyone else.
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