Tietenberg Tom, Lewis Lynne. Environmental & Natural Resource Economics
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391Discussion Question
of the control responsibility even when the control authority has no information on
control costs. A policy based on emissions standards cannot.
Policies ignoring these distinctions are not cost-effective. The use of a uniform
emissions charge or emissions trading (which are appropriate for uniformly mixed
pollutants) to allocate the responsibility for controlling a nonuniformly mixed
surface pollutant will not be cost-effective whenever transfer coefficients differ.
The fact that auctioned allowances or taxes can raise revenue is also an impor-
tant characteristic. If the revenue from pollution charges or auctioned allowances
can be used to reduce revenue from other, more distortionary taxes (such as labor
or income taxes), greater welfare gains can be achieved from revenue-raising
instruments than instruments that raise no revenue. On the other hand, historically
at least, transferring some or all of that revenue back to the sources either by
gifting the allowances or including some sort of tax rebate has been an important
aspect of securing the political support for implementing the system. Revenue use
for this purpose, of course, cannot be used to reduce distortionary taxes or lower
the regressive nature of the program.
The allowance approach and the charge approach respond differently to growth in
the number of sources, to inflation, to technological change, and to uncertainty. Price
volatility is likely to be greater for allowances than for emissions charges. As we shall
see in the next few chapters, some countries (primarily in Europe) have chosen to rely
on emissions charges, while others (primarily the United States) have chosen to rely
on cap-and-trade. We can now use this framework to evaluate the rather different
policy approaches that have been taken toward the major sources of pollution.
Discussion Question
1. In his book What Price Incentives? Steven Kelman suggests that from an
ethical point of view, the use of economic incentives (such as emissions
charges or emissions trading) in environmental policy is undesirable. He
argues that transforming our mental image of the environment from a
sanctified preserve to a marketable commodity has detrimental effects not
only on our use of the environment, but also on our attitude toward it. His
point is that applying economic incentives to environmental policy weakens
and cheapens our traditional values toward the environment.
a. Consider the effects of economic incentive systems on prices paid by
the poor, on employment, and on the speed of compliance with
pollution-control laws—as well as the Kelman arguments. Are economic
incentive systems more or less ethically justifiable than the traditional
regulatory approach?
b. Kelman seems to feel that because emissions allowances automatically
prevent environmental degradation, they are more ethically desirable
than emissions charges. Do you agree? Why or why not?
392 Economics of Pollution Control: An Overview
Self-Test Exercises
1. Two firms can control emissions at the following marginal costs: MC
1
⫽
$200q
1
, MC
2
⫽ $100q
2
, where q
1
and q
2
are, respectively, the amount of
emissions reduced by the first and second firms. Assume that with no control
at all, each firm would be emitting 20 units of emissions or a total of 40 units
for both firms.
a. Compute the cost-effective allocation of control responsibility if a total
reduction of 21 units of emissions is necessary.
b. Compute the cost-effective allocation of control responsibility if the
ambient standard is 27 ppm, and the transfer coefficients that translate
a unit of emissions into a ppm concentration at the receptor are,
respectively, a
1
⫽ 2.0 and a
2
⫽ 1.0.
2. Assume that the control authority wanted to reach its objective in 1(a) by
using an emissions charge system.
a. What per-unit charge should be imposed?
b. How much revenue would the control authority collect?
3. In a region that must reduce emissions, three polluters currently emit 30
units of emissions. The three firms have the following marginal abatement
cost functions that describe how marginal costs vary with the amount of
emissions each firm reduces.
Firm Firm 1 Firm 2 Firm 3
Emissions
Reduction
Marginal
cost
Marginal
Cost
Marginal
Cost
1
$1.00 $1.00 $2.00
2 $1.50 $2.00 $3.00
3 $2.00 $3.00 $4.00
4 $2.50 $4.00 $5.00
5 $3.00 $5.00 $6.00
6 $3.50 $6.00 $7.00
7 $4.00 $7.00 $8.00
8 $4.50 $8.00 $9.00
9 $5.00 $9.00 $10.00
10 $5.50 $10.00 $11.00
Suppose this region needs to reduce emissions by 14 units and plans to do it
using a form of cap-and-trade that auctions allowances off to the highest
bidder.
a. How many allowances will the control authority auction off? Why?
b. Assuming no market power, how many of the allowances would each firm
be expected to buy? Why?
393Further Reading
c. Assuming that demand equals supply, what price would be paid for those
allowances? Why?
d. If the control authority decided to use an emissions tax rather than
cap-and-trade, what tax rate would achieve the 14-unit reduction
cost-effectively? Why?
Further Reading
Baumol, W. J., and W. E. Oates. The Theory of Environmental Policy, 2nd ed. (Cambridge, UK:
Cambridge University Press, 1988). A classic on the economic analysis of externalities.
Accessible only to those with a thorough familiarity with multivariable calculus.
Harrington, W., R. D. Morgenstern, and T. Sterner. Choosing Environmental Policy:
Comparing Instruments and Outcomes in the United States and Europe (Washington, DC:
Resources for the Future, 2002). Uses paired case studies from the United States and
Europe to contrast the costs and outcomes of direct regulation on one side of the Atlantic
with an incentive-based policy on the other.
OECD. Economic Instruments for Environmental Protection (Paris: OECD, 1989). A survey of
how economic incentive approaches to pollution control have been used in industrialized
nations that belong to the OECD.
OECD. Environment and Taxation: The Cases of the Netherlands, Sweden, and the United States
(Paris: OECD, 1994). Background case studies for a larger research project seeking to
discover the extent to which fiscal and environmental policies could be made not only
compatible but also mutually reinforcing.
Rock, M. Pollution Control in East Asia: Lessons from Newly Industrializing Countries
(Washington, DC: Resources for the Future, Inc., 2002). These studies of pollution
management in East Asia’s newly industrialized economies (NIEs) include successful
government responses in Singapore and Taiwan, qualified results in China and Indonesia,
and much more limited success in Thailand and Malaysia.
Stavins, R. N. “Experience with Market Based Environmental Policy Instruments,” in K. G.
Maler and J. R. Vincent, eds. Handbook of Environmental Economics, Volume 1:
Environmental Degradation and Institutional Reponses (Amsterdam: Elsevier, 2003):
355–435. A review of what we have learned from our experience with market-based
instruments.
Sterner, T. Policy Instruments for Environmental and Natural Resource Management (Washington,
DC: Resources for the Future, Inc., 2003). Intended primarily for audiences in developing
and transitional countries, this volume compares the accumulated experiences of the use of
economic policy instruments in the United States and Europe, as well as in select rich and
poor countries in Asia, Africa, and Latin America.
394 Economics of Pollution Control: An Overview
Tietenberg, T., ed. Emissions Trading Programs: Volume I Implementation and Evolution and
Volume II Theory and Design. International Library of Environmental Economics and
Policy (Aldershot, UK: Ashgate, 2001). A two-volume collection of the leading published
articles on emissions trading, coupled with an editor’s introduction that traces the history
of our state of knowledge about this policy instrument.
Additional References and Historically Significant References are available on this book’s
Companion Website: http://www.pearsonhighered.com/tietenberg/
395Appendix: The Simple Mathematics of Cost-Effective Pollution Control
Appendix
The Simple Mathematics of Cost-Effective
Pollution Control
Suppose that each of N polluters would emit u
n
units of emission in the absence of
any control. Furthermore, suppose that the pollutant concentration K
R
at some
receptor R in the absence of control is
(1)
where B is the background concentration and a
n
is the transfer coefficient. This K
R
is
assumed to be greater than Φ, the legal concentration level. The regulatory problem,
therefore, is to choose the cost-effective level of control q
n
for each of the n sources.
Symbolically, this can be expressed as minimizing the following Lagrangian with
respect to the Nq
n
control variables:
(2)
where C
n
(q
n
) is the cost of achieving the q
n
level of control at the nth source and
is the Lagrangian multiplier.
The solution is found by partially differentiating (2) with respect to and the N
q
n
’s. This yields
Solving these equations produces the N-dimensional vector q
0
and the scalar .
Note that this same formulation can be used to reflect both the uniformly mixed and
nonuniformly mixed single-receptor case. In the uniformly mixed case, every a
n
⫽ 1.
This immediately implies that the marginal cost of control should be equal for all
emitters who are required to engage in some control. (The first N equations would
hold as equalities except for any source where the marginal cost of controlling the first
unit exceeded the marginal cost necessary to meet the target.) For the nonuniformly
mixed single-receptor case, in the cost-effective allocation the control responsibility
would be allocated so as to ensure that the ratio of the marginal control costs for two
emitters would be equal to the ratio of their transfer coefficients. For J receptors both
* and Φ* would become J-dimensional vectors.l
l
a
N
n= 1
a
n
1u
n
- q
n
2 + B -£=0.
0C
n
1q
n
2
0q
- l*a
n
Ú 0,n = 1, Á ,N,
l
l
min
a
N
n= 1
C
n
1q
n
2 + l c
a
N
n= 1
a
n
1u
n
- q
n
2 -£d
K
R
=
a
N
n= 1
a
n
u
n
+ B
Policy Instruments
A special meaning can be attached to . If emissions trading were being used, it
would be the market-clearing price of an allowance. In the uniformly mixed case,
would be the price of an allowance to emit one unit of emission. In the nonuni-
formly mixed case, would be the price of being allowed to raise the
concentration at the receptor location one unit. In the case of taxes, represents
the value of the cost-effective tax.
Note how firms choose emissions control when the allowance price or tax is
equal to . Each firm wants to minimize its costs. Assume that each firm is given
allowances of Ω
n
, where the regulatory authority ensures that
for the set of all emitters. Each firm would want to
The minimum cost is achieved by choosing the value of q
n
(q
n
0
) that satisfies
This condition (marginal cost equals the price of a unit of concentration
reduction) would hold for each of the N firms. Because P* would equal * and the
number of allowances would be chosen to ensure the ambient standard would
be met, this allocation would be cost-effective. Exactly the same result is achieved
by substituting T*, the cost-effective tax rate, for P*.
l
0C
n
1q
n
2
0q
n
- P*a
n
= 0.
min c
n
(q
n
) + P
0
[a
n
(u
n
- q
n
) -Æ
n
)].
a
N
n= 1
a
n
Æ
n
+ B =£
l
l
l
l
l
396 Economics of Pollution Control: An Overview
15
15
397
Stationary-Source Local and
Regional Air Pollution
When choosing between two evils, I always like to try the one I’ve never
tried before.
—Mae West, Actress
Introduction
Attaining and maintaining clean air is an exceedingly difficult policy task. In the
United States, for example, an estimated 27,000 major stationary sources of air
pollution are subject to control as well as hundreds of thousands of more minor
sources. Many distinct production processes emit many different types of pollutants.
The resulting damages range from minimal effects on plants and vegetation to the
possible modification of the earth’s climate.
The policy response to this problem has been continually evolving. The Clean Air
Act Amendments of 1970 set a bold new direction that has been retained and refined
by subsequent acts. By virtue of that act, the federal government assumed a much
larger and much more vigorous direct role. The U.S. Environmental Protection
Agency (EPA) was created to implement and oversee this massive attempt to control
the injection of pollutants into the nation’s air. Individually tailored strategies were
created to deal with mobile and stationary sources.
Conventional Pollutants
Conventional pollutants are relatively common substances, found in almost all
parts of the country, and are thought, on the basis of research, to be dangerous
only in high concentrations. In the United States, these pollutants are called
criteria pollutants because the Act requires the EPA to produce “criteria
documents” to be used in setting acceptable standards for these pollutants. These
documents summarize and evaluate all of the existing research on the various
health and environmental effects associated with these pollutants. The central
focus of air pollution control during the 1970s was on criteria pollutants.
398 Chapter 15 Stationary-Source Local and Regional Air Pollution
The Command-and-Control Policy Framework
In Chapter 14 several possible approaches to controlling pollution were described and
analyzed in theoretical terms. The historical approach to air pollution control, known
popularly as “command-and-control” (CAC), depended primarily on emissions stan-
dards. In this section we outline the specific nature of this approach, analyze it's short-
comings from an efficiency and cost-effectiveness perspective, and show how a series of
reforms based on the logic advanced in the last chapter has worked to rectify some of
these deficiencies.
For each of the conventional pollutants, the typical first step is to establish
ambient air-quality standards. These standards have to be met everywhere, although
as a practical matter they are monitored at a large number of specific locations.
Ambient standards set legal ceilings on the allowable concentration of the
pollutant in the outdoor air averaged over a specified time period. The allowable
concentrations for many pollutants are defined in terms of both a long-term
average (defined frequently as an annual average) and a short-term average (such as
a three-hour average). Compliance with short-term averages usually requires that
the allowable concentrations be exceeded no more than once a year. Control costs
can be quite sensitive to the level of these short-term averages.
In the United States, two ambient standards have been defined. The primary
standard is designed to protect human health. It was the first standard to be determined,
and had the earliest deadlines for compliance. All pollutants have a primary standard.
The primary ambient standards are required by statute to be set at a level sufficient to
protect even the most sensitive members of the population without any consideration
given to the costs of meeting them.
The secondary standard is designed to protect other aspects of human welfare
from those pollutants having separate effects. Currently, only one separate
secondary standard has been set, for sulfur oxides. For some other pollutants,
the concentration levels allowed by the primary and secondary standards are
the same. The secondary standards are designed to protect aesthetics (particu-
larly visibility), physical objects (houses, monuments, and so on), and vegetation.
When a separate secondary standard exists, both it and the primary standard
must be met. The existing primary and secondary standards are given in
Table 15.1.
While the EPA is responsible for defining the ambient standards, the primary
responsibility for ensuring that they are met falls on the state control agencies.
They exercise this responsibility by developing and executing an acceptable state
implementation plan (SIP), which must be approved by the EPA. This plan divides
the state into separate air-quality-control regions. Special procedures were devel-
oped for handling regions that cross state borders, such as metropolitan New York.
The SIP spells out for each control region the procedures and timetables for
meeting local ambient standards and for abatement of the effects of locally emitted
pollutants on other states. The required degree of control depends on the severity
of the pollution problem in each of the control regions. All areas not meeting the
original deadlines were designated as nonattainment regions.
399Conventional Pollutants
TABLE 15.1 National Ambient Air-Quality Standards
Primary Standards Secondary Standards
Pollutant Level Averaging Time Level Averaging Time
Carbon Monoxide
9 ppm (10 mg/m
3
) 8-hour
(1)
None
35 ppm (40 mg/m
3
) 1-hour
(1)
Lead 0.15 μg/m
3 (2)
Rolling 3-Month Average Same as Primary
1.5 μg/m
3
Quarterly Average Same as Primary
Nitrogen Dioxide
53 ppb
(3)
Annual (Arithmetic Average) Same as Primary
100 ppb 1-hour
(4)
None
Particulate Matter
(PM
10
)
150 μg/m
3
24-hour
(5)
Same as Primary
Particulate Matter
(PM
2.5
)
15.0 μg/m
3
Annual
(6)
(Arithmetic
Average)
Same as Primary
35 μg/m
3
24-hour
(7)
Same as Primary
Ozone 0.075 ppm (2008 std)
8-hour
(8)
Same as Primary
0.08 ppm (1997 std)
8-hour
(9)
Same as Primary
0.12 ppm
1-hour
(10)
Same as Primary
Sulfur Dioxide 0.03 ppm Annual (Arithmetic Average) 0.5 ppm
3-hour
(1)
0.14 ppm
24-hour
(1)
75 ppb
(11)
1-hour None
Notes
: Units of measure for the standards are parts per million (ppm) by volume, milligrams per cubic meter of air (mg/m
3
), and
micrograms per cubic meter of air (μg/m
3
). Values in parentheses represent approximate equivalent concentrations.
(1)
Not to be exceeded more than once per year.
(2)
Final rule signed October 15, 2008.
(3)
The official level of the annual NO
2
standard is 0.053 ppm, equal to 53 ppb, which is shown here for the purpose of clearer
comparison to the one-hour standard.
(4)
To attain this standard, the three-year average of the 98th percentile of the daily maximum one-hour average at each monitor
within an area must not exceed 100 ppb (effective January 22, 2010).
(5)
Not to be exceeded more than once per year on average over three years.
(6)
To attain this standard, the three-year average of the weighted annual mean PM2.5 concentrations from single or multiple
community-oriented monitors must not exceed 15.0 μg/m
3
.
(7)
To attain this standard, the three-year average of the 98th percentile of 24-hour concentrations at each population-oriented monitor
within an area must not exceed 35 μg/m
3
(effective December 17, 2006).
(8)
To attain this standard, the three-year average of the fourth-highest daily maximum eight-hour average ozone concentrations
measured at each monitor within an area over each year must not exceed 0.075 ppm (effective May 27, 2008).
(9)
a. To attain this standard, the three-year average of the fourth-highest daily maximum eight-hour average ozone concentrations
measured at each monitor within an area over each year must not exceed 0.08 ppm.
b. The 1997 standard—and the implementation rules for that standard—will remain in place for implementation purposes as
EPA undertakes rule making to address the transition from the 1997 ozone standard to the 2008 ozone standard.
c. EPA is in the process of reconsidering these standards (set in March 2008).
(10)
a. EPA revoked the one-hour ozone standard in all areas, although some areas have continuing obligations under that standard
(“anti-backsliding”).
b. The standard is attained when the expected number of days per calendar year with maximum hourly average concentrations
above 0.12 ppm is < 1.
(11)
Final rule signed June 2, 2010. To attain this standard, the three-year average of the 99th percentile of the daily maximum one-
hour average at each monitor within an area must not exceed 75 ppb.
Source
: http://www.epa.gov/air/criteria.html
400 Chapter 15 Stationary-Source Local and Regional Air Pollution
The areas receiving this designation are subjected to particularly stringent
controls. Nonattainment areas have been placed within one of seven categories
(basic, marginal, moderate, serious, two categories of severe, and extreme). Each
category has its own criteria for compliance with the standard. Generally, the more
severe the degree of nonattainment in an area, the more stringent the requirements
imposed on it. To prod the states into action, Congress gave the EPA the power to
halt the construction of major new or modified pollution sources and to deny federal
sewage and transportation grants for any state not submitting a plan showing
precisely how and when attainment would be reached.
Recognizing that it is typically much easier and much cheaper to control new
sources rather than existing ones, the Clean Air Act established the New Source
Review (NSR) Program. This program requires all new major stationary sources
(as well as those undergoing major modifications) in both attainment and nonat-
tainment areas to seek a permit for operation. This permit requires compliance
with the specified standards (more stringent in nonattainment areas than in attain-
ment areas). The theory was that as old, dirtier plants became obsolete, this
program would ensure that their replacements would be significantly less pollut-
ing. As Debate 15.1 points out, the New Source Review Program has stimulated
some controversy.
Simply promulgating regulations is not enough. They must be enforced with
appropriate sanctions whenever noncompliance occurs. Congress established the
noncompliance penalty to promote compliance. Without sanctions, the source
benefits from delaying compliance. Equipment purchases necessary to ensure
compliance are expensive, and add nothing to profits, while the benefits, the
reduced emissions, are typically externalities. The noncompliance penalty is
designed to harmonize these private incentives with the social objectives pursued
by the act.
The magnitude of the penalty is determined by the economic value of delay to
the source. Any economic gains received by the source as a result of noncompliance
are included in the penalty and are transferred to the EPA; this particular penalty
design removes any economic incentive for delaying compliance.
The Efficiency of the Command-and-Control
Approach
Efficiency presumes that the allowable concentration levels authorized by the
ambient standards are set where the marginal benefit equals the marginal cost.
To ascertain whether or not the current standards are efficient, it is necessary to
inquire into five aspects of the standard-setting process: (1) the threshold concept
on which the standards are based; (2) the level of the standard; (3) the choice of
uniform standards over standards more tailored to the regions involved; (4) the
timing of emissions flows; and (5) the failure to incorporate the degree of human
exposure in the standard-setting process.
The Threshold Concept. Since the Clean Air Act prohibits the balancing of
costs and benefits, some alternative criterion must be used to set the standard.