Using Marginal Damages in Environmental Policy

Robert O. Mendelsohn, Nicholas Z. Muller

Description

This technical volume makes the case that air pollution policy in the United States can be improved through consideration of both the marginal abatement costs facing regulated sources, and the marginal damages associated with their emissions. The preferred approach is a fully efficient regulatory scheme. Recognizing that completely reforming today's regulatory program, which consists of a mix of command-and-control policies and cap-and-trade programs, is not likely to be easy in the short run, the authors propose a prioritization scheme for regulatory reform. This scheme ranks sources according to the net marginal damage of additional emissions. Policymakers should focus reforms on those sources and pollutants with the largest differences between marginal damages and marginal costs; this will yield the greatest return on incremental investments in abatement.

Sujets

• Public Finance
• Economie gestion
• Economics
• Business

Informations

• Publié par: AEI Press
• Date de parution: 19 janvier 2018
• Nombre de lectures: 0
• EAN13: 9780844772202
• Langue: English

Extrait

Using Marginal Damages in Environmental Policy
Using Marginal Damages in Environmental Policy
A Study of Air Pollution in the United States

Nicholas Z. Muller Robert Mendelsohn




The AEI Press
Publisher for the American Enterprise Institute WASHINGTON, D.C.
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Library of Congress Cataloging-in-Publication Data
Muller, Nicholas Z.
Using marginal damages in environmental policy : a study of air pollution in the United States / Nicholas Z. Muller and Robert Mendelsohn.
pages cm
Includes bibliographical references and index.
ISBN 978-0-8447-7218-9 (cloth) — ISBN 0-8447-7218-6 (cloth) — ISBN 978-0-8447-7220-2 (ebook) — ISBN 0-8447-7220-8 (ebook) 1. Air quality management—United States. 2. Air—Pollution—Government policy—United States. 3. Air—Pollution—Economic aspects—United States. 4. Environmental policy—United States. 5. Industries—Environmental aspects—United States. 6. Damages—United States. I. Mendelsohn, Robert O., 1952– II. Title.
TD883.2.M85 2012
363.739'260973—dc23
2012029459
© 2012 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI.
Printed in the United States of America
List of Illustrations
Figures I-1 Historic Emission Trends in the United States for Sulfur Dioxide, Volatile Organic Compounds, and Nitrogen Oxides from 1940 to 2007 I-2 Integrated Assessment Model Structure 2-1 APEEP PM 2.5 Ambient Concentrations, Annual Mean, 2002 (µg/m 3 ) 2-2 CMAQ PM 2.5 Ambient Concentrations, Annual Mean, 2002 (µg/m 3 ) 2-3 APEEP O 3 Ambient Concentrations, Annual Mean, 2002 (ppbv) 2-4 CMAQ O 3 Ambient Concentrations, Annual Mean, 2002 (ppbv) 4-1 Marginal Damage of PM 2.5 Emissions ($/ton/year) 4-2 Marginal Damage of SO 2 Emissions ($/ton/year) 4-3 Marginal Damage of NH 3 Emissions ($/ton/year) 4-4 Marginal Damage of NO x Emissions ($/ton/year) 5-1 Kernel Density Graphs: SO 2 Marginal Damage—Four Power Plants 5-2 Kernel Density Graphs: PM 2.5 Marginal Damage—Four Power Plants 5-3 Spatial Impact of SO 2 Emission from Power Plant in Indiana: 5th Percentile Draw 5-4 Spatial Impact of SO 2 Emission from Power Plant in Indiana: Median Draw 5-5 Spatial Impact of SO 2 Emission from Power Plant in Indiana: 95th Percentile Draw 6-1 Marginal Damage for Electric Power Generators in Title IV Cap-and-Trade Program as of 2002 ($/ton) 6-2 Marginal Damage Function for SO 2 Emissions at Two Power Plants 6-3 Change in SO 2 Emissions from Trading Ratios when the Marginal Cost Elasticity Equals –4 6-4 Change in SO 2 Emissions from Trading Ratios when the Marginal Cost Elasticity Equals –2 6-5 Change in SO 2 Emissions from Trading Ratios when the Marginal Cost Elasticity Equals –1 7-1 Net Marginal Damage for Two Industries 7-2 Net Marginal Damage for Two Industries with Identical Abatement Technology
Tables 2-1 Comparing APEEP-Predicted Concentrations to Observed Concentrations 2-2 Comparing APEEP-Predicted Concentrations to CMAQ-Predicted Concentrations by Pollutant 3-1 Epidemiology Studies Employed in APEEP 3-2 Dose-response Function Parameters for O 3 and Agricultural Crops 3-3 Dose-response Parameters for SO 2 and Man-made Materials 3-4 Recreation and Forest Mortality Parameters 3-5 Value of Health Impacts 3-6 Agricultural Crop Prices, 2002 3-7 Commercial Timber Prices, 2002 3-8 Value of Visibility 4-1 Marginal Damages of Emissions by Percentile ($/ton/year) 5-1 Stochastic and Deterministic Marginal Damages of Four Power Plants 6-1 Welfare Change from Using Trading Ratios That Reflect Marginal Damage for Different Cost Functions ($million/year) 6-2 Welfare Change from Using Trading Ratios and Changing Aggregate Emission Levels to Optimal Level ($million/year) 7-1 Marginal Damage by Source Type and Pollutant ($/ton/year) 7-2 Average Abatement Cost by Source Type and Pollutant ($/ton/year) 7-3 Regulatory Priority Using Net Benefit per Ton by Source Types 7-4 Percentage Share GED (Percentage Share Tonnage) 7-5 Percentage Share GED (Percentage Share Tonnage) 8-1 Gross External Damage ($billion/year) 8-2 GED and Emission Shares 8-3 Emissions, Marginal Damages, and GED by Pollutant and Source Location 8-4 Gross External Damages from Carbon Dioxide Emitted in the United States 8-5 Share GED and Emissions Including CO 2 8-6 Sensitivity Analysis of GED by Pollutant ($billion/year) 8-7 Experiments Using Average Damages 9-1 Gross External Damage ($billion/year) and Ratio to Value Added by Sector 9-2 Gross External Damages from Carbon Dioxide Emitted in the United States ($billion/year) 9-3 GED by Source Type and Pollutant ($million/year) 9-4 GED by Source Type and Location ($million/year) 10-1 Gross External Damage by Industry: Industries with the Largest GED ($billion/year) 10-2 Gross External Damages and Value Added from the U.S. Manufacturing Sector ($billion/year) 10-3 GED from the U.S. Electric Power Generation Sector 10-4 GED Relative to Value Added by Industry ($million/year)
Introduction
In this book, we argue that the United States has the opportunity to improve its air pollution regulatory regime. It can do so by reforming its current regulations—which are a mix of command-and-control policies and cap-and-trade programs—to be more economically efficient. We provide the theoretical apparatus to demonstrate that efficient regulations should be preferred over current regulations, and we argue that we now have the data and methods to make the design of an efficient regulatory regime possible. We also show how these data can be used to begin to develop a system of environmental accounts that measure the damages associated with pollution in the United States. Efficient regulations would be the next step in the evolution of air pollution regulation in the United States, which has passed through several stages over the last six decades.
Before World War II, there was little in the way of binding environmental regulation in the United States. After World War II, state and local governments began to react to deteriorating environmental conditions by controlling emissions. The federal government’s role in this area was initiated by the passage of the Clean Air Act (CAA) in 1963. The first federal regulations to control emissions were in the 1965 amendments to the CAA that established performance standards for automobile emissions. The CAA amendments of 1967 and 1969 established national emission standards for stationary sources and criteria for ambient air quality standards (USEPA 2008). The CAA amendments required the use of specific control technologies by polluters. These amendments employed technology standards.
In 1970, further amendments to the CAA created the U.S. Environmental Protection Agency (USEPA) and developed the National Ambient Air Quality Standards, which set maximum allowable concentrations of certain air pollutants harmful to human health for every county in the United States. Furthermore, the USEPA was granted broad authority to set emission standards across a range of existing pollution sources and to mandate more stringent standards for new sources. The 1970 CAA resulted in notable reductions in air pollution. Figure I-1 shows historic emission levels for three principal air pollutants: sulfur dioxide (SO 2 ), volatile organic compounds (VOCs), and nitrogen oxides (NO x ). This figure shows that the first appreciable emission reductions did not occur until the passage of the 1970 CAA; emissions of SO 2 , NO x , and VOCs all peaked in 1970 and declined precipitously thereafter.
Although a series of important amendments to the CAA were passed in 1977, our brief history of air pollution policy in the United States moves next to the 1990 amendments to the CAA. The 1990 amendments highlight the use of cost-effective market-based policies, which stand in stark contrast to the traditional reliance on command-and-control instruments embodied in earlier policies. The 1990 amendments established the first cost-effective regulations through the enactment of a cap-and-trade program. Under the Acid Rain Program, which was established by Title IV of the 1990 amendments, fossil fuel–powered electric generating plants were issued tradable permits for SO 2 emissions. These permits allowed firms to generate emissions of SO 2 provided that they held an allowance for each ton emitted. If any firm anticipated not having enough allowances, it could purchase additional allowances from another firm. Conversely, if a firm abated enough emissions so that it had excess permits, it was allowed to sell the permits to other firms. Recognizing that allowances are a valuable asset, regulated firms had an incentive to invest in abatement technology in order to sell their allowances to other participants in the program. This cap-and-trade program is cost-effective because each polluter equates the cost of abating an additional ton to the current permit price. The cap-and-trade program for SO 2 is estimated to have reduced abatement costs for utilities by as much as $1 billion annually. Later in the 1990s a similar cap-and-trade program for NO x emissions was instituted in the eastern United States to control ozone levels.

Regulation under the CAA has achieved marked reductions in pollution discharges, but these