1 But how control pollution? By Command or Decree? or Market Mechanism Because of pollution from...
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1 But how control pollution? By Command or Decree? or Market Mechanism Because of pollution from factories (industrialization) cars: emission standards open fires. There are perceived threats to global well-being: ozone layer depleting global warming sea levels rising; damage to low-lying areas (incl. entire countries) catastrophic climate changes reducing biodiversity Globally reducing environmental pollution is extremely high on the international agenda. Slide 2 2 Global consensus: pollution must be reduced Globally reducing environmental pollution is extremely high on the international agenda. International conventions have been debated and signed: Kyoto Protocol (which some did not sign) ends in 2012 New international conventions being debated today, with renewed calls for even more stringent control of pollution, especially carbon dioxide in the air by countries limiting pollution: successor to Kyoto Protocol Also calls for Government to use public policy to encourage switching to clean energy sources consuming products and services with small carbon foot-prints. and reducing pollution by factories and households Slide 3 3 Pollution must be reduced; but HOW exactly? Decree maximum targets everywhere (pollution capping) countries factories cars products Or use market mechanisms carbon price (issue in recent Australian elections) emissions trading. Or combination cap and trade Slide 4 4 What economic implications of Command or market mechanisms? Much disagreement and debate. Is it sensible to order all countries/factories/cars to reduce pollution by the same absolute amount? Or order them to reduce by the same proportionate amount? Is it sensible to order them to reduce to the same level of pollution? Per person? Per country? Per car? Per aeroplane? Are there market mechanisms (carbon or emissions trading) which requires minimal orders or bureaucrats or monitoring? Is there any combination of all these policies which work best? Is it fair that developed countries which have been polluting for a hundred years start imposing trade sanctions on poor developing countries because of their increased pollution in their attempt to accelerate growth so as to reduce their abject poverty? Slide 5 5 Development debate: trade sanctions on polluting countries? Recent development: developed countries wish to apply trade sanctions on exports of developing countries which are associated with increased pollution Developed countries themselves have been polluting far more for more than a hundred years They have now gone on to cleaner technology GDP per capita developed countries: > US$30,000 GDP per capita developing countries: < US$1,000 And developed countries want to impose trade sanctions on poor developing countries whose attempt to reduce their abject poverty results in increased pollution? Slide 6 6 Is there any ideal target for pollution? You cannot remove all pollution from the planet, How much pollution is the "right" amount to which all pollution must be reduced to? And must all countries, firms, factories, do these things regardless of what it costs them? These are all tough questions, with no easy answers. Important methodology: using marginal cost and marginal benefits approach. But is that good enough to tackle the totality of the problem? Or is there a need for some multi-faceted approach? Slide 7 7 Is zero pollution a correct objective: marginalist analysis Basically all modern industries and agriculture produce some pollution- impossible to reduce it to zero. The Marginal Social Costs of reducing pollution will be generally small at the beginning but keep rising the more and more you succeed in reducing pollution. Conversely, the Marginal Social Benefit of reducing pollution further keeps declining, the more and more you reduce pollution. MSC MSB % Reduction of Pollution per year100% $ 0% Slide 8 8 Optimal rate of pollution reduction: where MSB = MSC Anywhere to the left of r (the optimal % of pollution reduction) the MSB is higher than the MSC of reducing pollution, so % of pollution reduction should be increased. Anywhere to the right of r, the MSC is higher than the MSB of pollution reduction, and society would be better off reducing the pollution reduction. Of course the real difficulty is estimating what the actual dollar value of pollution reduction is at any point in time. MSC MSB % Reduction of Pollution per year 100% $ r Slide 9 9 Is this command mechanism economically sensible? eg Order all firms in the steel industry to reduce pollution by 50 tons of pollutant pa This may seem fair. Suppose that the Australian Government has given a commitment to reduce its pollution by a million tons per year. Government demands that every polluting firm in reduce its pollution by the same quantity- 50 tonnes per year. It appears fair. But is this economically sensible? But what if different firms have different Marginal Costs of reducing pollution? MCa Reduction of Pollution per year (tonnes) $ 50 MCb $300 $100 Slide 10 10 What would 2 sensible profit maximising firms do, if they knew each others marginal costs of reducing pollution to this 50 tonne mark Firm B would say to Firm A. Listen it is costing you $100 to reduce 1 tonne of pollution, I will pay you $120 to reduce pollution by an extra ton (ie by 51 tonnes), and I will only reduce 49 tonnes. A win-win solution, of course. And govt does not care: pollution is reduced by same 100 tons for these two companies. MCa Reduction of pollution per year (tonnes) $ cost per tonne 50 MCb 100 300 B1 A1 Slide 11 11 What would a smart Firm A ask for? If Firm A reduces his pollution by 51 tonnes, his MC of course is rising- suppose that it rises to $110. How much will Firm A ask Firm B, in order to reduce his pollution by an extra tonne? Any price more than $110 and he will make a profit. And anything less than $300, and he knows that Firm B will still make a saving. MCa Reduction of pollution per year (tonnes) $ cost per tonne 50 MCb 100 300 B1 A1 Slide 12 12 Firm B of course moves down to 49 tonnes of pollution reduction (B2) Firm A moves up to 51 tonnes (A2): what happens next? Suppose now MCb = $290, while MCa = $110. It is still cheaper for Firm A to reduce pollution more (to 52 tonnes) while Firm B reduces a lower 48 tonnes (total still being 100 tonnes). Again, a win-win situation for both. MCa Reduction of pollution per year (tonnes) $ cost per tonne 50 MCb 100 300 B1 A1 B2 5149 290 110 A2 Slide 13 13 The process continues until both firms have the same MC (eg $180) of reducing pollution further Perhaps where Firm B has reduced pollution by 40 tonnes, and Firm A by 60 tonnes. Firm A and Firm B will both have become better off by using the market- by trading amongst themselves, by how much each should pollute. And in equilibrium, the MC of reducing pollution is the same. Bonus mark: why is this better than the initial situation? Hint: look at total MC for the two firms of reducing pollution by 1 ton each. MCa Reduction of pollution per year (tonnes) $ cost per tonne 50 MCb 100 300 A1 B1 6040 180 Slide 14 14 ie with target pollution and allowing market trading Firm A and Firm B will both have become better off while Govt achieves its target reduction for these two firms. ie Ordering different firms to reduce pollution by the same amount is not economically sensible. But target reductions and allowing companies to trade: economically more sensible. MCa Reduction of pollution per year (tonnes) $ cost per tonne 50 MCb 100 300 A1 B1 6040 180 Slide 15 15 Similarly, demanding that each firm reduce its pollution to the same target level also is not economically sensible The curves here give the Marginal Cost for two firms to reduce their pollution to some target levels- marginal cost becomes extremely large the closer you get to 0. If they have both achieved a reduction to 50 units of pollution, you can see that for one it is costing it $200 per tonne at the margin, for the other it is costing it $100 per tonne MCb Target pollution level per year $ MC of Lowering Pollution to target level 50 MCa 100 A1 B1 200 0100 Slide 16 16 Again, if trading is allowed and does take place Bonus mark: what will happen? Firm B will offer to reduce his pollution to a lower level if paid $x > $100 To enable Firm A to increase his pollution level, as long as $x < $200. Process continues until both have the same marginal cost of reducing pollution. MCb To Target pollution level per year $ MC of Lowering Pollution to target level 50 MCa 100 A1 B1 A2 200 B2 0100 Slide 17 17 Is setting pollution targets for developing countries unfair? When the developed world demand that China and India must reduce their pollution by the same amount every year- what does that mean in practice? The Developed World may be producing (say) 500 million tons of pollution. For them to reduce total pollution by 50 million tonnes means a 10% reduction of total pollution. While the LDCs are producing only 100 million tonnes of pollution, to reduce by 50 million tonnes means a 50% reduction- which would destroy their economic growth, if successful. Any why have targets by countries? Given that clean air and environment is a human right, and the responsibility should be equally on all persons, why not have pollution targets per person eg so many tonnes of pollution per person will be allowed throughout the world. eg at 1 tonne per person, China will be allowed 1.3 billion tonnes, and US 290 million But currently US has 20 tons of carbon dioxide pollution per capita and China and India have less than 3 tonnes per capita. Slide 18 18 Is it fair to impose environment standards on LDC exports? eg WTO rules Seen as totally hypocritical in that developed countries have been polluting for two centuries, They still pollute far more in quantity than the developing countries And now that they have gone on to "cleaner" high tech high value added industries (like computers et