Notes for Chapter 5

1. Notes for Chapter 5 ECON 2390

2. Economics of Environmental Quality • The exchange of private goods and services will generally result in socially efficient (not necessarily equal or fair) outcomes provided there is • Perfect competition (perfect information) • No public element to any of the goods or services (no externality) • No economies of scale that lead to monopoly/monopsony or other forms of market power. • The exchange of goods and services that does not meet these conditions will not be socially efficient. • Normative economics – what ought to be. • Positive economics – what is. • Emission of GHG emissions (CO, CO2, SOx, NOx and CACs) is widely believed to be the leading cause of human caused (anthropomorphic) climate change. • These externalities are typically not captured in the price of fossil fuels leading to The social cost of “carbon”

3. Normative Policy • What is the target level of quality • Who are the emitters • What policies (education, taxes, subsidies, regulation) will meet the target? • What are the benefits and cost of the policy • Benefits and costs to society • Who gains/losses as a result of the policy

4. Determining Target Levels • Pollution control always involve tradeoffs • Other legitimate goals compete for policy space/resources • Fixed resources exist for policy • Diverting resources to pollution control will reduce economic growth now and in the future. • Pollution damages – costs and negative impacts arising from control. • Damage function • Emission damages – effect of emissions on the environment • Ambient damages – effect of concentration in the surrounding environment • Marginal damages – the increased damage arising from a unit increase in pollution • Total damages

5. Damage Functions • Properties • Linear: MD = a + b*E • Non-linear: MD = a + b*logE or MD=a + b*E2 • Single non-accumulative pollutant • No threshold • Height of function shows the damages at each level of emission • Total cost is the area under the curve between 0 and the given level.

6. Mitigation and abatement • Mitigation and abatement (costs of reducing the residuals being emitted • Changes to technology • Raising costs (through taxation) • Payments to recycle • Directives (regulation) to cease • Emissions and abatement are inverses

7. Emission – Abatement • The costs of abatement typically increase with increased abatement • In the chart, as emissions fall (abatement increases), costs rise. • The shape of the abatement cost is determined by technology and the organization of production/consumption

8. Marginal Abatement Costs • We use linear MAC for clarity. • The area under the MAC is the total abatement cost. • Moving from 1000 to 750 ppm (abating 250 ppm), costs more under MAC1 than MAC2 (by area “a”) • Technology and institutions (stakeholders who need compensation) are the big reasons by abatement cost may vary • Aggregate abatement costs for two pollution scenarios may be added (horizontally) to produce a total abatement costs (cleaning an oil spill and cleaning air pollution from a factory)

9. Zero pollution point

10. How can we measure environmental damages in money terms? • What about damage to future generations

11. Social equilibrium • The marginal abatement costs and marginal damage function identify an equilibrium where abatement balances damage. • It never pays to eliminate all pollution • Social equilibrium (efficiency) involves balancing (trading off) a marginal (unit) increase in pollution damage against a marginal (unit) in abatement cost. • Once the abatement costs exceed the damage averted, we stop. • When the marginal costs of abatement exceed the marginal reduction in damages we should stop. • Why?