Chapter 12

1. Sawyer: The UK Economy 16e Chapter 12 Environmental and Transport Policy

2. Nature of environmental problems • Environmental problems arise when the integrity of the life support systems and amenity, are compromised by human activity. • A major class of environmental problems is pollution, the discharge of waste products into the atmosphere, bodies of water or to land. • Another important class of environmental problems is the destruction of wildlife and its habitats. Wildlife losses reduce biodiversity, which is an important life support system.

3. Biodiversity • Biodiversity comprises three concepts: • species diversity – the diversity of plant and animal species present on earth; • ecosystem diversity – an ecosystem is a system of interacting and inter-dependent plants and animals; • genetic diversity -- the diversity of genetic material that the earth contains. Biodiversity is important for maintaining and advancing human progress.

4. Sustainable development • Debates on environmental policy has focused on the idea of sustainability and sustainable development. This debate springs from the belief that current levels of global economic growth is putting the life support systems at risk. • Factors leading to these fears. • The discovery of `holes’ in the stratospheric ozone layer resulting from supposedly inert substances commonly used in refrigeration and air conditioning. The stratospheric ozone layer performs a vital function in filtering out harmful ultra-violet radiation.

5. Sustainable development • The rate of destruction of tropical rain forests. The majority of species of plants and animals on earth are found in these habitats, and tropical forest plants have been the source of numerous vital pharmaceuticals and foodstuffs. The loss of these forests posed a serious threat to biodiversity and led to fears about the impacts on world climates. • Global climate change, global warming, stemming from the emission of greenhouse gasses. The most important of these is CO2 from the combustion of hydrocarbons in electricity generation and in motor vehicles. Deforestation is also an important source of CO2.

6. Causes of environmental problems • The traditional view of environmental economics is that environmental problems arise as a result of the presence of externalities. • Externalities are commonly described as impacts on the utility, cost or production function of one economic agent by variables under the control of another economic agent and where the effect is not the subject of a market transaction. • Pollution is generally a case of an externality.

7. Causes of environmental problems • The externality view of pollution has been challenged on the grounds that the key problem is not a failure to take account of such effects but a failure to understand them or even to be aware of their existence. • One traditional economic argument is that the prime cause of external effects is the inadequate definition and policing of property rights, since otherwise externalities would always be eliminated by market activity in the form of bargaining. • Two further important criticisms of the standard economic view of environmental problems given so far which that should be mentioned. • the assumption that government intervenes with the intention and ability to correct the problem; • application of this approach requires that we know how much compensation sufferers from environmental problems would need to fully compensate them.

8. Pollution policy • The objective of pollution control policy, therefore, is to prevent damage by containing pollution levels to the absorptive capacity of the environment. The authorities concerned achieve this by specifying pollution targets and controlling the activities of polluters to achieve them. • The policy issues concern the method of control, what is known as instrument choice, and how to monitor the effects of that control.

9. Pollution policy • Instrument choice • The economics of instrument choice for pollution control depend on the nature of the discharge source? Is it a point discharge or a non-point discharge? • The conditions for point pollution can be summarised as follows: • the locations of the discharge sources are known; • they are relatively few in number so that the costs of targeting them are not excessive; • the discharges are fairly regular in timing, not sporadic and unpredictable; • they can be detected and measured with current technology.

10. Pollution policy • Point pollution • There are then three basic control instruments that can be used: • A regulation backed by legal penalties usually fines. • A pollution tax • A tradable permit. A permit to discharge specified amounts of a pollutant. These may be bought and sold by polluters.

11. Pollution policy • The problem with a pollution tax is that to set it to the correct level, the control authority needs to know the polluters’ abatement cost curves. This information is not readily available to it. If it asks the polluters they will probably understate their real costs of abatement since that will reduce the tax that they pay. • The information problem is avoided by allowing the gains from trade to be realised. The authority fixes the standard as in the regulation but issues it to the polluters in the form of entitlements to pollute, which they can trade with each other. This is socially efficient because each polluter knows its costs of abatement and will trade if the price is right. This is the third instrument, the tradable permit. By creating a market in pollution permits or entitlements the authority is able to achieve the socially efficient distribution of pollution abatement without the information needed for the pollution tax.

12. Pollution policy • The conclusion that permits are more efficient than regulation needs further examination. The superiority of tradable permits arises because permits minimise the costs to polluters of meeting a given specified abatement target. But these are only part of the social costs of pollution control. There are in addition the costs to the authority of monitoring and enforcing its policy. Efficiency is achieved by choosing the instrument that minimises social costs of meeting the pollution target.

13. Pollution policy • Social costs = polluters costs + authority’s costs • There are reasons for supposing that the authority’s costs will be lower for regulation than for either taxes or tradable permits. • With a regulation the authority is monitoring to answer a simple question: are the emissions at or below the standard set? It does not need to know the actual level of emissions provided that they are within the permitted limit and further action is only required when a breach of regulation takes place. With a tax, on the other hand, the authority needs to determine the actual emissions in order to calculate the tax and in addition has to collect the tax. With a tradable permit system it has to determine the actual emissions and ensure that the polluters possess permits or entitlements for those emissions at the time they take place. These are more complex control problems that will require more sophisticated measurement and a more elaborate administration.

14. Pollution policy: Water • The responsible body in England and Wales is the Environment Agency. The starting point for the system is a set of targets for the water quality for controlled waters: rivers, estuaries and large lakes; known as Water Quality Objectives (WQOs). Industrial premises discharging into controlled water must have a discharge consent.

15. Pollution policy: Air • Control of air pollution is divided between Local Authorities, the Environment Agency and the Pollution Inspectorate. Emissions of sulphur dioxide, nitrous oxides and particulates are subject to a similar system to water. They are monitored at the chimneys, maximum volumes and concentrations of chemicals are specified and the polluters are liable to prosecution and fines if they exceed the limits. More toxic substances such as PCBs and the major sources of pollution such as large combustion plants and major chemical works are subject to a different system known as Integrated Pollution Control (IPC).

16. Pollution policy Integrated Pollution Control • With IPC the objective is to reduce the pollution to the lowest level possible and to choose the means of disposal which poses the least threat to the environment. This means that the medium to which the pollution is discharged can be varied to what is called the best practical option (BPO). Within BPO another acronym applies, BATNEEC, best available technology not entailing excessive economic cost. Land • The principal issue concerns the disposal of waste, domestic and industrial to landfill sites. By EU Directives the UK Government is attempting to increase the proportion of waste that goes to recycling rather than land fill. Local Authorities have been given recycling targets and a tax is levied on the volume of waste going to landfill. This is the only current example of the use of a tax to control point pollution.

17. Pollution Policy • Non-point pollution • With non-point pollution it is not possible to directly measure and target pollution. Recourse, therefore, has to be to indirect methods.

18. Transport Policy • The transport sector is a very major cause of environmental problems, including air pollution, noise, water pollution from run-off, and visual intrusion • The ideal charging system would charge a rate per vehicle kilometre that would vary with the emission characteristics of the vehicle and with where and when it was used. Such systems are now technically possible in the form of electronic road pricing which, although developed primarily to deal with problems of congestion, could also be used to reflect the environmental costs of road use. • It is likely that any such systems introduced for the foreseeable future will be confined to large cities and will be much simpler flat rate charges for entering an urban area, with only limited differentiation by vehicle type.

19. Transport Policy • A more significant development is the government’s proposals for introducing a charge per kilometre for heavy goods vehicles administered by satellite based location technology, which would pave the way for much more differentiated charges. The government has also announced a review of inter-urban road charging, though with any reforms being still well into the future. • The final approach discussed above, that of tradeable permits, appears extremely complicated for a system involving millions of different vehicles

20. Transport Policy • For many years, government policy towards roads was what has been described as predict and provide. • An important part of this so-called 'new realism' in transport policy was an appreciation of environmental constraints, but it was also argued that in purely practical and fiscal terms it would simply not be possible to cope with forecast traffic growth by increasing road space.

21. Transport Policy The key features of the July 1998 White Paper were: • An emphasis on integration: between and within modes; and between policy areas - transport, environment, land use, health, education. • The introduction of new five year local transport plans, produced by local authorities to show how the objectives of transport policy would be achieved. • The establishment of a strategic rail authority which directly contributes to the funding of new rail infrastructure as well as being responsible for refranchising passenger services on the basis of improvements in service rather than purely emphasising minimisation of subsidies.

22. Transport Policy • The promotion of bus quality partnerships or quality contracts in order to make bus transport a more attractive alternative. Quality partnerships are agreements between local authorities and bus operators that both will contribute to increased services, for instance by the local authority providing more priority and better information, and the operator new vehicles. • A new appraisal framework to be applied to government funding of all modes of transport, in order to achieve a better balance of objectives. • Powers for local authorities to introduce road pricing or a tax on non-residential parking and to retain (most of) the revenue to finance other transport measures.

23. Transport Policy • The major new development since the White Paper was the publication of the 10 year transport plan in 2000 (DETR, 2000). This foresaw a major increase in spending on all modes of transport, including expansion of trunk road and motorway capacity, local road maintenance, a major increase in heavy rail spending and some 25 new light rail schemes.

24. Wildlife policy • Problems of wildlife policy properly viewed as policy failure, a consequence of inappropriate Government policies. • More than 90 per cent of the land in Britain that is not built on is agricultural land. Most of the remainder is plantation forest. The only areas that might under some definition be called wild are the inter-tidal zones, the tops of some of the highest mountains and some small off-shore islands. In consequence much of Britain’s wildlife exists on agricultural land and agricultural policy is central to its conservation.

25. Wildlife policy • Agriculture development over the last fifty years has been characterised by two inter-related processes: intensification and specialisation. These processes have led to large-scale losses of wildlife and wildlife habitats. Habitats have been lost by the destruction of hedgerows and farm woodlands, the ploughing up of old grassland, the drainage of wet meadows and marshland, the replacement of hay meadows by temporary grass and arable crops and the ploughing of stubbles for winter-sown cereals. In addition to the destruction of habitat, intensive use of pesticides and fertilisers has further destroyed wildlife. Survey data has shown large reductions in the populations of almost all species of farmland birds and virtual extinction of many plants and insects.

26. Wildlife policy • Wildlife might be viewed as a positive externality of the agricultural industry, a by-product of farming that has the characteristics of a public good. • Wildlife conservation in England is the responsibility of a statutory body English Nature (EN), answerable to the Department of the Environment. The Countryside Council for Wales and Scottish National Heritage fulfil the same role in Wales and Scotland. These bodies designate Sites of Special Scientific Interest (SSSIs) that need protection. The basic instrument for protecting SSSIs is a management agreement with the owner of the land. The owner agrees to manage the land in ways that protect the scientific interest in return for a payment based on the profits she would make by damaging the site. If it were ploughed up the plants would be destroyed but the owner would receive higher profits. The payment would be the difference between the profits from the two uses of the land.

27. Wildlife policy This system of protection has been subject to a number of criticisms: • Management agreements are voluntary and for a limited period. • The owner is compensated for losses from protecting the site. In contrast polluters are not compensated for their losses from reducing pollution and instead can be fined for polluting. • Wildlife habitats are fragile and easily damaged and the damage is often irreversible. • There is a problem of moral hazard: the landowner can take action which damages the scientific interest and blame it on natural causes. • EU legislation takes a different approach to protection. The Habitats Directive is concerned with protecting biodiversity from deliberate destruction from economic activities such as road building, urban development, mining and quarrying.

28. Cost Benefit Analysis There are a number of methods that may be used to produce money values of environmental effects. The most common are: • estimates based on preferences revealed in market transactions (revealed preference methods). • methods based on hypothetical questions (stated preference methods). • methods based on avoidance costs.

29. Cost Benefit Analysis • The methods used and the results obtained from environmental valuation remain highly controversial and their use in practical decision taking rare. • For instance, in the road sector, where a form of cost-benefit analysis is applied to all major projects, the only costs and benefits quantified in money terms are capital and maintenance costs, vehicle operating costs, journey time savings and changes in accidents. • Environmental effects are assessed in physical terms and a 'score' is attached to the overall environmental impact of the road (on a seven point scale ranging from large beneficial to large adverse). The resulting scores relating to all the objectives of road investment are then subjectively assessed to produce a decision. Whether this approach leads to too much or too little emphasis being placed given on environmental effects is a matter of hot debate.

30. The global environment • Global environmental impacts are particularly problematic to deal with because the impacts of pollutants emitted in one country have impacts on citizens of other countries. • A tendency for each country only to take action to curb emissions to the extent that it is justified by the benefits to their own citizens. • In the case of global warming, international negotiations led to the Kyoto Protocol, which was agreed in December 1997. Under this, the ECU collectively agreed to cut greenhouse gas emissions by 8 per cent below 1990 levels by 2008-2012. Subsequent negotiations concluded that the UK had an above average scope for cutting emissions and that its target should be a 12.5 per cent cut. However, the British government has set itself the tougher target of reducing greenhouse gas emissions to 20 per cent below 1990 levels by 2010.

31. The global environment • Global warming from carbon dioxide emissions is clearly an area in which the potential for pricing as a way of allowing for environmental costs is greatest. Carbon has the same effect in terms of global warming wherever and whenever it is emitted, and, therefore, a simple tax on the carbon content of fuels, would appear to be the most efficient instrument way of achieving the target. • The effect of increased energy prices on consumption in the transport sector in the long term appears to be substantial, with a 10 per cent increase in the price of fuel leading to a reduction in motoring of the order of 3 per cent, and an improvement in the fuel efficiency of cars of a similar magnitude.