Chapter 12
Emission Taxes Taxes and Subsidies If we want to build a house, we have to buy building materials; nobody is likely to give them to us free. If we want to have architects and carpenters work on the house, we will have to hire them; they won’t work for nothing. In other words, in order to use the services of these inputs, we have to pay for them. We are used to doing this, because these goods and services are bought and an d sold in well-developed well-developed markets. The fact that we have to pay for them gives us an incentive to use the inputs as sparingly and efficiently as possible. The economic-incentive approach to environmental policy works in much the same way. ntil recently people have been able to use the waste-disposal services of the environment virtually without cost, so there has been little incentive for them to think about about the environmental environmental conse!ue conse!uences nces of their actions and to economi"e economi"e on the use of these environmental environmental resources. The incentive approach seeks to change this situation. There are basically two types of market-based subsidies idies and $(& transferable transferable market-based incentive policies# $%& ta'es and subs emission permits. )oth re!uire a regulator to put the program into effect and to monitor outcomes, so they are less decentrali"ed than liability laws or letting parties bargain over emission levels. *egulators set a price for pollution via ta'es and subsidies and set !uantities of allowed emissions with transferable emission permits. The market determines the price of pollution under the permit approach. nder each policy, polluters make their own decisions about the amount of pollution to emit based on the prices per unit pollution they face. +overnmnets worldwide are increasingly turning to economic incentives, including some e'amples in anada. In the nited tates and urope, emission markets have been in place for a number of years; for sulphur dio'ide in the and greenhouse gases in urope. This chapter e'amines the economic theory of emission charges and subsidies; hapter %/ covers the techni!ue of using transferable emission permits. hapters %0 and (1 look at policies in a nada and other countries i n practice. Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 1
conomists have long promoted the idea of incorporating incentive-based policies more thoroughly into environmental policies.% Incentive-based policies can be more cost effective than standards and provide more stimulus for polluters to seek cost-reducing abatement strategies. can serve to put more teeth into environmental policies in many cases and substantially improve the cost-effectiveness of these policies. )ut keep in mind something we have said before# No single type of policy is likely to be the best in all circumstances . Incentive based policies are no e'ception. They have strengths and they have weaknesses. The strengths are sufficiently strong to encourage greater reliance on them in many circumstances. )ut there are types of environmental problems where they may not be as useful as other approaches, and politically, they may be more challenging to install than standards. hapter %2 looks in more detail at the tradeoffs among policies and why polluters and regulators may favour one type over another %.
3n economist who emphasi"ed the role of ta'es as a method of internali"ing e'ternalities was 3.. 4igou, way back in the %5/1s. nvironmental ta'es are sometimes called Pigouvian taxes after him.
Emission Taxes The most straightforward incentive-based approach to controlling emissions of a particular residual is to have a public agency offer a financial incentive to change those emissions. This can be done in two ways# by ta'ing each unit of emissions, or by giving a subsidy for each unit of emissions that the source cuts back. We deal first with emission ta'es, sometimes also called emission charges. mission ta'es imply that polluters are able to discharge any amount of the ta'ed pollutant they wish, but they will be re!uired to pay a ta' for every unit $e.g., tonne& discharged. 6or e'ample, the )ritish olumbia government has imposed a carbon ta' in (117 on over 08 percent of the greenhouse gases emitted in the province as a means of reducing carbon dio'ide emissions and ameliorating global warming. )’s goal is to reduce carbon emissions by %9/ of their (110 level by (1(1 and to be 71: below (110 levels by (181. When an emission ta' is put into effect, those responsible for emissions must pay for the services of the environmenttransportation, dilution, chemical decompositionpriced? by the ta', those who release it will have an incentive to release less of it; that is, to conserve on their use of environmental services. @ow do they do thisA 3ny way they wish $within reason&. This may sound flippant, but in fact it represents the main advantage of this techni!ue. )y leaving polluters free to determine how best to reduce emissions, they can use their own energy and creativity, and their desire to minimi"e costs, to find the least-cost way of reducing emissions. It could be any combination of pollution abatement, substitution of one good for another, internal process changes, changes in inputs, recycling, or shifts to less-polluting outputs. In the case of )’s carbon ta', people may reduce their dependence on motor vehicles by driving less, taking public transit, car pooling, adding more insulation to their homes to reduce heating costs. Industries may shift from higher carbon-intensive fuels such as petroleum and coal to less carbon-intensive fuels such as natural gas or electricity, which in ) is predominately produced by hydro power and hence, carbon free. Bore detail on )’s carbon ta' is provided below.
The essence of the tax approach is to provide an incentive for the polluters themselves to find the best way to reduce emissions, rather than having a central authority determine how it should be done.
The Basic Economics o% Emission Taxes The essential mechanics of an emission ta' are depicted in 6igure %(-%. The numbers refer to a single source of a particular pollutant who has a marginal abatement cost function of B3 C (11 D 2 E . 3ssume that the regulator has set the emission ta' at E%11 per tonne per month. The top panel shows the analysis numerically, while the bottom shows the same information graphically. The second column of the table shows the firm’s marginal abatement costs and the third column shows total abatement costs at each emission level. The last two columns show the total monthly ta' bill the firm would pay at different emission levels and the total private cost of compliance .
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 2
Fiure 12$1' The )asic conomics of an mission Ta'
3n emissions ta' of E%11 per tonne of pollutant released per month is levied on a polluter. The table shows marginal and total abatement costs, the polluter’s ta' bill, and total costs. Total costs are minimi"ed at discharges of (8 tonnes9month. This is shown graphically as the point where the ta' rate intersects the polluter’s B3 curve. 3rea a is the ta' bill; area b shows the total abatement costs.
Total private cost of compliance of an emission tax is defined as the sum of abatement costs and the tax bill for the polluter. 3s we’ll see, these are not the same as social costs. The minimum total cost of E/,081 occurs at an emission rate of (8 tonnes9month. The logic behind this can be seen by considering marginal abatement costs. With no regulation, the polluter emits at E 1 C 81 tonnes9month and pays a ta' bill of E8,111 $i.e., 81 tonnes times E%11&; if it were to cut emissions to 28 tonnes it would cost E81 in abatement costs, but on the other hand it would save E811 in ta'esclearly a good move. 6ollowing this logic, it could improve its bottom line by continuing to reduce emissions as long as the ta' rate is above marginal abatement costs. The rule for the firm to follow is this# reduce emissions until marginal abatement costs are e!ual to the emissions ta' rate. This is shown diagrammatically in the bottom part of 6igure %(-%. To reiterate, Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ (
polluters will minimize their total private costs by reducing emissions until the tax rate equals their marginal abatement cost. 3fter the polluter has reduced its emissions to (8 tonnes9month, its total $monthly& ta' bill will be E(,811. Its monthly abatement costs will be E%,(81. +raphically, total abatement costs correspond to the area under the marginal abatement cost function, labelled b in the figure. The total ta' bill is e!ual to emissions times ta' rate, or the rectangle labelled a. Total private cost is thus area $a F b&. uppose the polluter is a firm. Why wouldn’t the firm simply disregard the ta', continue to pollute the way it has been, and
Emission Taxes vs. a tandard ompare the ta' approach with an emission standard. With the ta', the firm’s total outlay is E/,081. uppose that, instead, the authorities had relied on an emission standard to get the firm to reduce emissions to (8 tonnes9month. In that case, the firm’s total outlay would be only the E%,(81 in abatement costs. Thus, the ta' system ends up costing the firm more than the standards approach. With a standard, the firm has the same total abatement costs as in the ta' system but it is still essentially getting the services of the environment free, while with a ta' system it has to pay for those services. )ut while polluting firms would thus prefer standards to emission ta'es, there are good reasons, as we shall see, why society would often prefer ta'es over standards.
The Socially E%%icient Tax In competitive situations, higher ta'es will bring about greater reductions in emissions, but
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ )
Fiure 12$2' 3 ocially fficient mission Ta'
The socially efficient e!uilibrium is reached with a ta' set e!ual to E%11 per tonne. This is the >price? at which BG C B3. The polluter’s private costs of compliance are its total ta' bill paid, area $ a F b F c F d &, plus its total abatement costs, area e. Total social costs of compliance are
ocial costs of compliance include only the real resources used to meet the environmental target! they do not include the tax bill. Ta'es are actually transfer payments, payments made by the polluters to the public sector and eventually to those in society who are benefited by the resulting public e'penditures. The polluter itself may be a recipient of some of these benefits. Transfer payments are therefore not a social cost of the policy. Thus, the social costs of compliance are area e, the polluter’s total abatement costs. ociety is also interested in the net social benefits from the ta' policy.
"et social benefits of a policy are defined as the total damages forgone net of the social costs of compliance.
Example' Compute net social bene%its %or Fiure 12$2 The steps are as follows# %.
ompute total damages forgone. Total damages forgone is measured by the area under the BG curve from the initial level of emissions to the socially efficient level, E H. This is areas $ e F f & C E/,081.
(.
ompute total abatement costs. Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ *
T3 C area e C E%,(81. /.
ompute net social benefits. et social benefits C total damages forgone minus total abatement costs. et social benefits C areas $ e F f & minus area e C E(,811.
ompare the net social benefits of the emission to a standard set at the socially efficient level of emissions, (8 tonnes per month. The net benefits of the standard are identical. Thus a ta' and standard, set at the same level, yield identical net benefits to society. What differs is the impact on the polluters. The reduction of emissions from E 1 C 81 to E H C (8 tonnes per month has eliminated damages of $ e F f &. *emaining damages are $ b F d &, an amount less than the firm pays in ta'es. This underscores the idea that the emission ta' is based on the right to use environmental resources, not on the notion of compensation. )ut a >flat ta'? like this $one ta' rate for all emissions& has been critici"ed because it would often lead to situations where the total ta' payments of firms would substantially e'ceed remaining damages. 3 way around this is to institute a two part emission tax . We allow some initial !uantity of emission to go unta'ed, applying the ta' only to emissions in e'cess of this threshold. 6or e'ample, in 6igure %(-( we might allow the firm E % C %1 tonnes of emissions free of ta', and apply the ta' rate of E%11 per tonne to anything over this. In this way the firm would still have the incentive to reduce emissions to E H, but its total ta' payments would be only $c F d &. Total abatement costs, and total damages caused by the E H units of emissions, would still be the same. @ow could regulators introduce an emission ta' if they do not know the marginal damage functionA We know that emissions are connected to ambient !uality; in general, the lower the emissions the lower the ambient concentration of the pollutant. o one strategy might be to set a ta' and then watch carefully to see what effect this had in terms of improving ambient !uality levels. The regulator would have to wait long enough to give firms time to respond to the ta'. If ambient !uality did not improve as much as desired, increase the ta'; if ambient !uality improved more than was thought appropriate, lower the ta'. This is a successive appro'imation process of finding the correct long-run emissions ta'. It might be a good idea, however, for regulators to give polluters some advance warning of any rate changes. In responding to a ta', polluters might invest in a variety of pollution-control devices and practices, many of which would have relatively high upfront costs. This investment process could be substantially upset if, shortly afterward, the authorities shift to a substantially different ta' rate. ( The setting of the ta' could become politici"ed as a result. While it is better to find the correct ta' rate when the policy is introduced, ta'es at least allow for the possibility of iterating to the socially efficient ta' rate. There is no way to do this with a standard. This issue will be e'amined in detail in hapter %2. (.
ote, however, that firms and consumers deal daily with prices that can change considerably. 3 good e'ample is the retail price of gasoline. 3d
Emission Taxes and Cost$E%%ecti#eness 4erhaps the strongest case for a policy of emission ta'es is to be made on grounds of cost-effectiveness; that is, when controlling multiple sources of emissions in a way that satisfies the e!uimarginal principle. If we apply the same ta' rate to different sources with different marginal abatement cost functions, and each source reduces its emissions until their marginal abatement costs e!ual the ta', then marginal abatement costs will automatically be e!uali"ed across all the sources. To repeat,
the imposition of an emission tax will automatically satisfy the equimarginal principle because all polluters will set the tax equal to their #$% curve. #$%s will be equalized across all sources. This is depicted in 6igure %(-/. 3ssume pollution comes from two sources, plants @ and J, and that emissions are uniformly mi'ed, so that the emissions of the two plants are e!ually damaging in the downstream, or downwind, impact area. The marginal abatement costs for the two sources are the same as those used in 6igure %%2 of hapter %%. / ow impose a ta' of E(11 per kilogram on each source, assuming the regulator has computed the BG curve and set the target ta' rate accordingly. 4lant @ will reduce its emissions to 71 kilograms per month, while J will reduce its emissions to (1 kilograms9month. Their marginal abatement costs have to be identical, Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ +
because the ta' has become the implicit price of pollution and that price is the same for both. The total reduction is %11 kilograms9month, which the effluent ta' has automatically distributed between the two firms in accordance with the e!uimarginal principle. ote very carefully that the emission ta' has led plant J to reduce its emissions by more than 7/ percent, while plant @ has reduced its emissions by only // percent. The emissions ta' leads to larger proportionate emission reductions from firms with lower marginal abatement costs. onversely, firms having steeper marginal abatement costs will reduce emissions less, in proportionate terms. /.
*ecall from hapter %% that differences in the plants’ B3 curves can be due to the fact that the firms are using different production technologies. They may be producing different outputs $e.g., a pulp mill and a food-canning firm&, or they may be plants in the same industry but using different production techni!ues $e.g., coal-fired and hydroelectric power plants&. The higher the ta' rate the more will emissions be reduced. In fact, if the ta' rate were increased to something over E(819kilogram, J would stop emitting this residual entirely. It would take a much higher ta', EK11 per kilogram, to lead @ to reduce emissions to "ero. 3 single effluent ta', when applied to several firms, will induce a greater reduction by firms whose marginal abatement costs increase less rapidly with emission reductions than from firms whose marginal abatement costs increase more rapidly. ince the firms are paying the same ta' rate, they will have different total abatement costs and different ta' bills. ote from 6igure %(-/ that @’s ta' bill $E%K,111& is much higher than J’s $E2,111&.
Emission Taxes #s. Standards @ow does the ta' compare to a uniform standard also set to achieve a total reduction of %11 kilograms per monthA The regulator institutes a proportionate cutback in emissions from each source; each is allowed to emit no more than 81 kilograms per month. 3t this point their marginal abatement costs would be different. The table below compares the social compliance costs $total abatement costs& under the ta' versus the uniform standard.
Fiure 12$(' mission Ta'es 3re ost-ffective
3 uniform emissions ta' of E(11 per kilogram of carbon mono'ide released is cost-effective. )oth polluters set the ta' e!ual to their B3 curve. @ reduces emissions to 71 kilograms; J to (1 kilograms per month.
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ ,
ocial ompliance osts $E9month& niform tandard
mmission Ta'
$81 kilograms9month each&
$E(11 per kilogram&
4olluter J
2,511
%1,111
4olluter @
%(,(81
2,111
Total costs
E%0,%81
E%2,111
ote that the totals differ. Total abatement costs under the uniform standard are ((.8 percent larger than those of the emission ta'. The simple reason is that the uniform standard violates the e!uimarginal principle; it re!uires the same proportionate cutback regardless of the height and shape of a firm’s marginal abatement costs. $Luestion# What are the social compliance costs of a ta' versus individual standards for this e'ampleA& These are
when #$%s differ among polluters, social compliance costs are lower under a tax than a uniform standard meeting the same target level of emissions because the tax is cost-effective and the uniform standard is not. 3nother important difference between ta'es and standards is that
an emission tax is cost-effective even if the regulator knows nothing about the marginal abatement costs of any of the sources. This is in clear contrast with the standards approach, where the public agency has to know e'actly what these marginal abatement costs are for each firm in order to have a fully cost-effective programthat is, individual standards. In a ta' approach, the only re!uirement is that firms pay the same ta' and that they are cost minimi"ers. 3fter each one has ad
Emission Taxes- the Double Di#idend- and the BC Carbon Tax Ta'es have another potential advantage over standards and subsidies D ta' revenue is collected. +overnments then need to decide what to do with this ta' revenue. Their choices are to use it to increase government e'penditures or Mrecycle’ the revenue back to the economy by handing it back to individuals and companies. 3s long as the recycling does not affect the ta' price of pollution, there will still be the same incentives to reduce emissions. conomists have advocated using emission ta' revenues to reduce other ta'es that provide disincentives to work, save, and invest in the economy; ta'es such as on payrolls, income, and investment. )y reducing these distortionary ta'es, there may be what has been come to be known as the double dividend to society. The first dividend is the reduction in emissions thereby leading to a healthier environment. The second dividend is the increase in consumption, savings, work effort, and investment in the economy due to lower ta' rates. 3s noted above, )ritish olumbia introduced a carbon ta' and was the first
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $
cuts. It is too soon to see how well the ta' is working. )aseline data on carbon emissions for (110 in each ) municipality has been collected and can be compared to emissions over time to help gauge the impact of the ta'.
BC Ministry of Finance Carbon Tax information: http://www.n.gov.bc.ca/tbs/tp/climate/carbon_tax.htm.
Emission Taxes and the /ncenti#es to /nno#ate =ne of the main advantages of emission ta'es is that they provide strong incentives for investing in new technologies that have lower marginal abatement costs for controlling emissions. This is shown in 6igure %(-2, which shows the two marginal abatement cost curves for a single firm that were represented in 6igure %%-8. 3s before, B3% represents the current condition. It shows the costs the firm would e'perience in cutting back its emissions with the particular technology it currently uses. B3 (, on the other hand, refers to abatement costs that the firm would e'perience after engaging in an *OG program to develop a new method of reducing emissions. What are the incentives for this firm to put money into the *OG program when a ta' is levied on its emissionsA Jet the ta' be E%11 per tonne of emissions. The polluter will set that ta' rate e!ual to B3 % and reduce emissions to (1 tonnes. 3t this point its total pollution-related costs will consist of $ a F b& worth of abatement costs and a ta' bill of $c F d F e&. If the polluter can lower its marginal abatement cost curve to B3 ( through the *OG activities, it would then reduce its emissions to %8 tonnes. 3t this point it would pay $b F d & in abatement costs and e in ta'es. The reduction in total costs has been E$ a F c&. If the firm had instead been faced with an emissions standard set at (1 tonnes, its cost savings with the new technology would have been only a, as we saw in hapter %%. 3lso, as we saw in hapter %%, if public authorities make the standard more stringent when the new technology becomes available, the firm’s cost saving would be less than if the standard is unchanged. 8 8
. *eview the section in hapter %% on incentive effects.
Fiure 12$)' Incentives to Invest in ew 4ollution ontrol Technology under an mission Ta'
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 0
mission ta'es provide a big incentive to invest in *OG to lower marginal abatement costs. The cost saving from using a new technology $B3(& is area $ a F c& under a ta' set at E%11 per tonne of emission. 3 standard set at (1 tonnes of emissions yields a cost saving of only area a if the standard remains at (1 tonnes. There are thus two key differences between incentives to innovate under ta'es versus standards. 1.
The firm’s *OG efforts will lead to a bigger reduction in its pollution-control-related costs $abatement costs plus ta' payments& under a policy of emission ta'es than under a standards approach.
2.
nder the ta' system the firm would automatically reduce its emissions as it found ways to shift its marginal abatement cost function downward, whereas under the standard no such automatic process would result.
The difference is that under a ta' approach, polluters must pay for emissions as well as for abatement costs, while with standards they need pay only abatement costs. o, their potential cost savings from new pollutioncontrol techni!ues are much larger under the ta' program.
Emission Taxes and En%orcement Costs Ta'es pose a different type of enforcement problem than standards. 3ny ta' system re!uires accurate information on the item to be ta'ed. If emissions are to be ta'ed, they must be measurable at reasonable cost. This means that residuals flowing from a source must be concentrated in a small enough number of identifiable streams that monitoring is possible. This rules out most nonpoint-source emissions, because they are spread thinly over a wide area in a way that makes them impossible to measure. It would normally be impossible to ta' the pollutants in agricultural runoff because the diffuse nature of the >emissions? makes them impossible to measure. @owever, if there is a well-defined relationship between agricultural input use and emissions, an input ta' may be easy to impose and enforce. ertain to'ic chemical emissions may also be difficult to ta' because, in addition to being nonpoint sources, they are often in such small !uantities that their flow rates are difficult to measure. With emission ta'es, the ta'ing authorities would be sending a ta' bill to the polluting firms at the end of each month or year, based on their total !uantity of emissions during that period. o the agency would re!uire information on cumulative emissions from each source. This process is more involved than
ther Types o% Taxes o far, we have discussed only one type of ta'# an effluent or emissions ta'. ince it is the emission of residuals that leads directly to environmental pollution, ta'es on emissions presumably have the greatest leverage in terms of altering the incentives of polluters. )ut there are many situations where it is impossible or impractical to levy ta'es directly on emissions. In cases where we can’t measure and monitor emissions at reasonable cost, ta'es, if they are to be used, would obviously have to be applied to something else. 3 good case of this is the problem of water pollution from fertili"er runoff in agriculture. It is impossible to ta' the kilograms of nitrogen in the runoff because Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 1
it is a nonpoint-source pollutant and thus not directly measurable. The same problem applies to agricultural pesticides. What may be feasible instead is to put ta'es on these material s as they are sold to farmers; that is, a ta' per tonne of fertili"er or per %11 kilograms of pesticide purchased. This ta' e'ists in some states. The ta' is to reflect the fact that a certain proportion of these materials ends up in nearby streams and lakes. *aising the prices of these items would give farmers the incentive to use them in smaller !uantities. The higher price also creates the incentive to use the fertili"er in ways that involve less waste; for e'ample, by reducing the amounts that run off.
Example' Taxin trash 4lacing a ta' on something other than emissions is usually a >second-best? course of action made necessary because direct emissions can’t be closely monitored. In cases like, this we have to watch out for distortions that can come about as people respond to the ta', distortions that can substantially alleviate the effects of the ta' or sometimes make related problems worse. 6or e'ample, some .. communities have tried to ta' household trash. =ne of the techni!ues is to sell stickers to the residents and re!uire that each bag of trash has a sticker on it. The rate of ta' is determined by the price of the stickers, and it is relatively easy to monitor and enforce the system through curbside pickup operations. )ut the per-bag ta' will produce an incentive to pack more into each bag, so the reduction in total !uantity of trash may be less than the reduction in the number of bags collected.
Example' Taxin emissions %rom cars uppose we ta' emissions of nitrogen o'ides and hydrocarbons discharged from cars. The ta' on any car is determined by the !uantity of emissions per kilometre that a car produces, as determined by testing $done either by nvironment anada or the car manufacturers&. The obleverage? and produce smaller results than if it had been put directly on total emissions.K K.
ee *obert randall, >4olicy Watch# orporate 3verage 6uel conomy tandards,? Journal of Economic Perspectives K $pring %55(&# %0%D%71 for an interesting discussion of this same problem arising from technological regulations.
Distributional /mpacts o% Emission Taxes There are two primary impacts of effluent ta'es on the distribution of income and wealth#
impacts on prices and output of goods and services affected by the ta'
effects stemming from the e'penditures of revenues generated by the ta'
)usinesses sub
of the burden. @ow much prices go up depends on demand conditions. 4rice increases are often thought of as regressive because, for any given item, an increase in price would affect poor people proportionately more than higher-income people. 6or something that both poor and well-off people consume, like electricity, this conclusion is straightforward. 6or price increases in goods consumed disproportionately by more well-to-do people $e.g., airline travel&, however, the burden would be mostly on them. The burden on workers is tied closely to what happens to the rate of output of the affected firms. @ere again, the e'tent of the output effect depends on competitive conditions and the nature of demand for the good. If the emission ta' program is applied to a single firm in a competitive industry, or if the demand for the output of an industry is very responsive to price, output ad
batement Subsidies 3n emission ta' works by placing a price on the environmental asset into which emissions are occurring. ssentially the same incentive effects on the margin would result if, instead of a ta', we instituted a subsidy on emissions. @ere, a public authority would pay a polluter a certain amount per tonne of emissions for every tonne the polluter reduced, starting from some benchmark level. The subsidy acts as a reward for reducing emissions. Bore formally, it acts as an opportunity cost# when a polluter chooses to emit a unit of effluent, they are in effect forgoing the subsidy payment they could have had if they had chosen to withhold that unit of effluent instead. Table %(-% shows how this works in principle, using the same numbers used for 6igure %(-%. The regulator pays a subsidy for each unit by which the polluter reduces its emissions, starting from a base level . We assume the base level is its emissions rate before any policy is imposed# 81 tonnes9month. The polluter receives a subsidy of E%11 per tonne for every tonne it cuts back from this base. The fourth column shows its total subsidy revenues, and the last column shows total subsidies minus total abatement costs. This net revenue peaks at (8 tonnes9month, the same emissions level the polluter would choose with the E%11 ta'. In other words, the incentive is to reduce emissions to the point where the unit price of the subsidy intersects the B3 curve; the e!uilibrium reached is in theory the same for each polluter as with the emissionsta'.
Table 12$1' 3n 3batement ubsidy
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 12
Bany of the points we made earlier about emission ta'es also apply to emission subsidies. The
Deposit34e%und Systems =ne place where subsidies may be more practical is in depositDrefund systems. 3 depositDrefund system is essentially the combination of a ta' and a subsidy. The ta' is the deposit and the subsidy is the refunda type of penalty and reward program. The purpose of the subsidy is to provide the incentive for people to refrain from disposing of these items in environmentally damaging ways. It is their reward. The funds for paying the subsidy are raised by levying ta'es on these items when they are purchased. In this case, the purpose of the ta' is not necessarily to get people to reduce the consumption of the item, but to raise money to pay the subsidy. If people choose not to return the item and collect their refund, the ta' can be viewed as a disposal charge.
4ecyclin Council o% British Columbia' !!!.rcbc.bc.ca" 4ecyclin Council o% lberta' !!!.recycle.ab.ca"
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 1(
4ecyclin in Sas5atche!an' http'""!!!.en#ironment.o#.s5.ca"De%ault.aspx6DN722%b0d*2$,2+*$)2aa$0,(d$ (2,)ab+2da2* 4ecyclin Council o% ntario' https'""!!!.rco.on.ca"
GepositDrefund systems are particularly well-suited to situations where a product is widely dispersed when purchased and used, and where disposal is difficult or impossible for authorities to monitor. In anada, si' provinces have enacted depositDrefund systems for beverage containers, some like ) cover all beverages e'cept milk products, others focus on beer, wine and soft drinks. The goal of these policies is to reduce litter and to encourage recycling. ) also has deposit-refund systems for car batteries, tires, paint, and a growing number of other products. This approach has also been widely used in urope with what is called Mcradle to grave’ recycling. 6or e'ample, in weden and orway, depositDrefund systems have been instituted for cars. ew-car buyers pay a deposit at time of purchase, which will be refunded when and if the car is turned over to an authori"ed
S8994: mission ta'es attack the pollution problem at its source, by putting a price on something that has been free and, therefore, overused. The main advantage of emission ta'es is their efficiency aspects# If all sources are subindirect? character of effluent ta'es can sometimes provide a stronger inducement to emission reductions than seemingly more direct approaches. )ut emission ta'es re!uire effective monitoring. They cannot be enforced simply by checking to see if sources have installed certain types of pollution-control e!uipment. If emission ta'es are to have the appropriate incentive effects, they must be based closely on cumulative emissions. Thus, point sources where emissions can be effectively measured are the likely candidates for pollution control via emissions ta'es. 3n advantage of emission ta'es is that they provide a source of revenue for public authorities. Bany have recommended that ta' systems be changed to rely less on ta'es that have distorting economic effects and more on emissions ta'es. This re!uires that authorities be able to predict with accuracy the effects of particular emission ta'es on rates of emissions. missions subsidies would have the same incentive effect on individual polluters, but they could lead to increases in total emission levels. =ne place where subsidies have been used effectively is in depositDrefund systems, which are essentially ta' and subsidy systems in combination.
;E: TE49S nvironmental ta' shifting, (21 Barket-based incentive policies, ((8 Total private cost of compliance, ((K Transfer payments, ((5 Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 1)
Two-part emission ta', (/1 Poned emission ta', (/2
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6or 6igure %(-2 and the e!uations B3% C (11 D 8 E and B3( C %K1 D 2 E , compute the cost savings to the polluter if it adopts the new technology $B3 (& after the introduction of an emission ta' of E%11 per tonne. ompute the cost savings under a standard that is set at (1 tonnes. 'plain why the ta' provides a larger incentive to innovate than does the standard.
2.
uppose a regulator wants to introduce an emission ta' on discharges of mercury into waterways. Illustrate the impact of the ta' on two industries that discharge mercury# gold mining $as part of its processing&, and dentistry $flushing mercury from fillings down the drain&. Giscuss the following !uestions# $a& @ow would the regulator measure mercury discharges from both sourcesA $b& Would the ta' be uniformA $c& What is the likely impact of the ta' on the prices of gold and dental servicesA $Qou will need to make some specific assumptions here about the nature of demand for these products.& $d& What are some incentives to alter production technologiesA $e& What are the distributional impacts of the ta'A se graphs to support your arguments.
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sing the numbers given in Table %(-%, or knowing that B3 C (11 D 2 E for a polluter, illustrate graphically the impact of a subsidy of E%11 per tonne on the polluter’s emissions. ontrast the subsidy with an emissions ta' of the same amount and discuss differences in $a& incentives created, $b& ease of implementation, $c& distributional impacts, and $d& effects on polluting industries.
D/SC8SS/N >8EST/NS 1.
uppose that we institute an emission charge on a particular pollutant, and we use the proceeds of the ta' to help subsidi"e the short-term capital costs by firms in the same industry of installing emission-reduction e!uipment. Will this approach upset the incentive effects of the emission ta'A
2.
uppose the federal government proposes a ta' on = ( emissions. The ta' is to be levied on the sulphur content of the fuel used by utilities and other industries because emissions from these sources are difficult to measure. )ut in cases where firms have ways of measuring the = ( content of e'haust gases, the ta' will be levied on the =( content of the gases. Will this system lead to a socially efficient e!uilibriumA $Qou will need to make some specific assumptions to answer the !uestion.&
(.
=pponents of emission charges argue that polluters will simply pay the ta'es and pass the cost on to consumers without reducing emissions. Is this correctA 'plain.
Barry C. Field & Nancy D. le!iler"En#ironmental Economics"Third Canadian Edition" Chapter 12 $ 1*
