Question

C. One of the criteria for evaluating an environmental policy is the difficulty of implementing and enforcing the policy. Compare implementation and enforcing efforts required for the following types of environmental policies: command and control, pollution taxes, and transferable discharge permits.

D. Explain the optimal multiperiod harvest rotation of a forest plantation. What equilibrium condition determines when a plantation should be harvested?

Answer 1

There are many different types of environmental policies. No single policy is appropriate for all the many environmental problems the world faces. In evaluating the effectiveness and appropriateness of a policy for addressing a given problem in environmental pollution control, it is important to have clearly in mind a set of policy evaluation criteria. The criteria to be used in later chapters to discuss specific environmental policies are the following:

■ Ability to achieve efficient and cost-effective reductions in pollution

■ Fairness

■ Incentives offered to people to search for better solutions

■ Enforceability

■ Extent to which policies agree with certain moral precepts

Efficiency and Cost-Effectiveness

An efficient policy is one that moves us to, or near, the point where marginal abatement costs and marginal damages are equal. To discover where this point is we must know both costs and damages. Chapter 5 showed how to derive the socially efficient equilibrium in theory, while Chapters 7 and 8 illustrated ways to estimate abatement costs and environmental damages (or damages foregone) in practice.

One way of thinking about environmental policies is along a continuum from centralized to decentralized. A centralized policy requires that some administrative agency be responsible for determining what is to be done. To achieve efficiency in a centralized policy the regulatory agency in charge would have to know the relevant marginal abatement cost and marginal damage functions, then take steps to move the situation to a point where they are equal.

A decentralized policy gets results from the interaction of many individual decision makers, each of whom is essentially making his or her own assessment of the situation. In a decentralized approach, the interactions of individuals themselves serve to reveal the relevant information about marginal abatement costs and marginal damages and to adjust the situation toward the point where they are equal.

When it is difficult or impossible to measure damages produced by environmental degradation, the socially efficient level of emissions (or environmental quality) cannot be determined with certainty. In this case, decision makers may look for the policies that achieve any chosen target at the lowest possible cost, or produce the biggest emission reduction or environmental quality gain for a given level of abatement costs.This is the notion of cost-effectiveness may then be the primary policy criterion. A policy is cost-effective if it produces the maximum environmental improvement possible for the resources being expended or, equivalently, it achieves a given amount of environmental improvement at the least possible cost. For a policy to be efficient it must be cost-effective, but not necessarily vice versa. A policy might be cost-effective even if it were aimed at the wrong target. Suppose we decided to clean up the St. Lawrence River, regardless of what the benefits are. We would still be interested in finding policies that did the job cost-effectively, at the lowest cost or provides the biggest gains.

The capability of a policy to achieve cost-effective emission reductions, besides yielding the maximum improvement for the resources spent, is also important for another reason. If programs are not cost-effective, the policy-makers and administrators will be making decisions using an aggregate abatement cost function that is higher than it needs to be, leading them to set less restrictive targets in terms of desired amounts of emission reductions. This is shown in Figure 9-1, for a case of SO2 emissions. With a cost-ineffective policy the perceived marginal abatement cost is the higher one, labelled MAC1, whereas with a cost-effective approach marginal abatement costs would be MAC2.1 Suppose regulators choose a target level of SO2 emissions of 100,000 tonnes. They will think that total abatement costs are $4.5-million, because they perceive abatement costs to be MAC1.2 If a cost-effective program were undertaken and MAC2 achieved, total abatement costs at 100,000 tonnes would be only $2.5-million. Alternatively, the regulator could choose a higher level of emission reduction at the same total abatement costs as under MAC1. In either situation, society is much better off with a cost-effective policy.

To summarize, cost effectiveness

■ is a key policy criterion when regulators cannot measure the MD curve;

■ minimizes the total costs of reaching a given target level of environmental quality;

■ allows society to achieve higher target levels of environmental quality than inefficient policies because of cost savings.

Efficiency and cost-effectiveness are important because, although preserving environmental resources is critically important, it is only one of the many desirable things that people seek. Advocates are usually convinced that their objectives are automatically worth the cost, but success depends on persuading large numbers of other people that environmental policies are efficiently designed. Thus, the resources devoted to environmental quality improvement ought to be spent in ways that will have the greatest impact. This is especially important in less developed economies, where people have fewer resources to put in environmental programs and can ill afford policies that are not cost-effective and efficient. Cost-effectiveness also becomes an important issue in industrialized countries during times of recession or economic stagnation.

1. MAC1 could be higher than MAC2 for a number of different reasons, as will be discussed in detail in upcoming chapters in this section. The key point here is that when policies are inefficient, costs of controlling emissions are higher than they would be under a cost-effective regime.

2. Recall that total abatement costs are the area under the MAC curve from the initial emission level (in this case 200,000 tonnes) to the target level of emissions (100,000 tonnes).

Fairness

Fairness, or equity, is another important criterion for evaluating environmental policy (or any policy, for that matter) as we’ve noted in previous chapters. Equity is a not only a matter of morality, it is also a concern for policy effectiveness, because policies may not be supported as enthusiastically in the political arena if they are thought to be inequitable. Having said this, however, we have to recognize that there is no agreement on how much weight we should put on the two objectives: efficiency and equity. Refer back to Chapter 6 and Table 6-3 for an illustration of ways to incorporate distribution impacts into a decision.

It is an open question how much emphasis should be put on the distributional impacts of environmental policy compared to their other characteristics. On one side is the argument that environmental degradation is so pervasive that society should focus primarily on policies that are the most efficient—that give us the most impact for the resources spent. On the other is the position that society should avoid policies, even efficient ones, that have a strongly regressive impact. Whatever one feels about these distributional impacts—and it does depend on personal values to a great extent—we need to keep in mind that distributional considerations should have some weight in the selection of environmental policies.

Equity considerations also loom large in the making of international environmental policy. Countries at different stages of development have different views on how the burdens of international pollution-control programs should be distributed. These views are driven by considerations of what seems fair in the light of the wide economic disparities around the globe.

Incentives for Innovation

In studying environmental policy much of the focus normally is cast on the performance of public officials, since they appear to be the source of that policy. But it is private parties—firms and consumers whose decisions actually determine the range and extent of environmental impacts3—and the incentives facing these private parties that determine how and where these impacts will be reduced. Thus, a critically important criterion that must be used to evaluate any environmental policy is whether that policy provides a strong incentive for individuals and groups to find new, innovative ways of reducing their impacts on the ambient environment; that is, does it stimulate technological progress in this area? Does the policy place all the initiative and burden on public agencies, or does it provide incentives for private parties to devote their energies and creativities to finding new ways of reducing environmental impacts?

It is easy to miss the importance of this sometimes when we concentrate on the abatement cost and damage functions in our standard analysis. These show the efficient level of emissions according to the current functions, but over the longer run it is important to try to shift these functions downward. Lowering the MAC will make it cheaper to secure reductions in emissions because this will justify higher levels of environmental quality, as was illustrated earlier in this chapter. Technological change shifts the marginal abatement cost function downward. So do education and training, which allow people to work and solve problems more efficiently. Ultimately we want to know whether—and how much—a particular environmental policy contains incentives for polluters to seek better ways of reducing pollution. The greater these incentives the better the policy, at least by this one criterion.

Enforceability

Imposing regulations and ensuring that they are met requires the resources of people, time, and institutions. There perhaps is a natural tendency among people to think that enacting a law automatically leads to the rectification of the problem to which it is addressed. It is unlikely that polluters will more or less automatically comply with whatever laws are enacted, even in countries that have relatively strong legal traditions and institutions. Policies have to be enforced through the monitoring of emissions or technologies used, negotiations with polluters about timetables for compliance, and the legal system used to address violations of a law. Unfortunately, there will always be people whose interests lie in not having environmental policies enforced. All of these actions are the administrative costs that must be incurred with any policy.

The reason for pursuing this is that policies differ in terms of how easy it is to enforce them. Some may require sophisticated technical measures to get reasonable enforcement; others may be enforceable at much lower cost. There is no sense in attempting a dazzling new policy approach if it is essentially impossible, or very costly, to enforce. We may be better off settling for a less-perfect policy that is more easily enforceable. There are two main steps in enforcement: monitoring and sanctioning. Monitoring refers to measuring the performance of polluters in comparison to whatever requirements are set out in the relevant law. Sanctioning refers to the task of bringing to justice those whom monitoring has shown to be in violation of the law. The objective of enforcement is to get people to comply with an applicable law. Thus, some amount of monitoring is normally essential; the only policy for which this does not hold is that of moral suasion. Monitoring polluting behaviour is far more complicated than, say, keeping track of the temperature. Nature doesn’t really care, and so it won’t willfully try to outwit and confound the monitoring process. But polluters who are intelligent human beings and who may stand to lose money if environmental laws are vigorously enforced can usually find many ways of frustrating the monitoring process. And the more sophisticated and complicated that process, the easier it may be for polluters to find ways of evading it.

3. It is also the case that many serious cases of environmental destruction have been caused by public agencies.

The other main part of enforcement is sanctioning polluters who are in violation of the law. This may sound like a simple step: if violators are found, simply take them to court and levy the penalties specified in the relevant law. But things are much more complicated than this. Court cases take time and energy and resources. With many laws and many more violators, the burden on the legal system of trying to bring all violators to justice may be overwhelming. Violators are also reluctant participants; they may devote many resources to fighting the sanctions, turning the procedure into long, drawn-out, costly court battles. In many cases the data underlying the sanctions will be imperfect, leading to challenges and costly conflicts. To create a demonstration effect it may be desirable for authorities to sanction only a few of the most egregious violations, but this opens up the problem of trying to determine just which violators to single out. It is perhaps no wonder that in the real world many violators, especially first-time violators, are not sanctioned with the full penalties allowed by the law. Very often authorities try to achieve voluntary compliance and encourage violators to remedy the situation without penalty.

There is a paradox built into the sanctioning process. One might think that the greater the potential sanctions—higher fines, long jail terms for violators, and so on—the more the law would deter violators. But on the other hand, the higher the penalties the more reluctant courts may be to apply them. The threat to close down violators, or even to levy stiff financial penalties, can in turn threaten the economic livelihoods of large numbers of people. Courts are usually reluctant to throw a large number of people out of work or put corporate executives into jail, and so may opt for less drastic penalties than allowed by the law. A trade-off exists between the size of the penalty and the probability that it will be imposed. So the sanctioning process can become much more complicated than the simple model implies.

We have very little information in Canada about these administrative costs. The size of the budgets for environmental ministries at the federal and provincial level are known, but how do we tell what proportion of the costs of the legal system represent environmental compliance costs? We have some sketchy data on enforcement activities—the number of investigations, warnings, prosecutions, convictions and so on—but it isn’t clear what these data tell us about compliance. The data indicate that enforcement activity is occurring, but also that very few prosecutions and convictions have resulted. Does this mean that compliance with the regulation is high or that violations aren’t being detected? Or does it simply mean that compliance is obtained through methods other than legal enforcement activities? In Canada, negotiation between polluters and government agencies is a common method of obtaining compliance. Another widespread practice is for agencies to require self-reporting of emissions by firms, with the public authorities carrying out periodic audits of these records and perhaps also periodic testing of emissions.

Enforcement costs are an important segment of environmental quality programs. Public agencies virtually everywhere face budget constraints, but also responsibilities that are large and continually growing. Thus, the costs of enforcement, though perhaps not as large as overall compliance costs in most cases, are critical to the success of environmental quality programs and ought to be treated explicitly in evaluating the overall social costs of these programs.

Moral Considerations

Moral considerations extend beyond the equity and distributional issues discussed above. The innate feelings that people have about what is right and wrong undoubtedly affect the way they look at different environmental policies. These have to be weighed in the balance along with the more technical criteria we have discussed above.

Take, for example, the question of choosing between effluent taxes and effluent subsidies. Both are economic-incentive-type policies, and both might reduce pollution per source by the same amount. From the standpoint of effectiveness, one might argue that subsidies would be better. Polluters might very well respond more quickly and with greater willingness to a subsidy program than to one that is likely to cost them a lot of money. Strictly from the standpoint of getting the environment cleaned up as soon as possible, subsidies might be the most effective. But this may run counter to the ethical notion that people who are causing a problem ought not to be “rewarded” for stopping, which is how subsidies are sometimes viewed. There is much moral appeal in the notion that the “polluter should pay.”

Some people would take this idea further and argue that polluting behaviour is immoral. Therefore, we should adopt policies that make certain types of polluting behaviour illegal. Another idea grounded in morality is that those who cause a problem ought to bear the major burden of alleviating it. We see this, for example, in discussions of global environmental issues. The industrial nations, especially the most economically developed among them, are largely responsible for the atmospheric buildup of CO2 and the deterioration of the protective ozone layer. Many people take the view that these countries ought to bear the major burden in rectifying the situation.

With these criteria in hand, we are now ready to launch into a study of different types of environmental policies. We begin with several approaches that are on the more decentralized end of the continuum, after which we investigate the use of environmental standards, the approach most frequently resorted to in the past. Finally, we look at what are called economic-incentive-based policies.