Today: • Why do governments regulate for environmental, health and safety protection? • How do governments regulate for environmental, health and safety protection? • IMC/Atlantic Circuits scenario • Different approaches to regulation
Why Regulate? Do you support laws that regulate private activity to protect the environment? Why? • because pollution is morally wrong? • because pollution harms people directly? • because pollution harms people indirectly? • because pollution harms other living things?
ENVIRONMENTAL ECONOMICS: • KEY IDEAS • Externalities • Public Goods • Characteristics of public goods • Tragedy of the Commons • Free rider problem • Prisoner’s Dilemma
PRISONER'S DILEMMA 4=best; 1=worst COLUMN Cooperate Defect ROW Cooperate | 3, 3 1, 4 Defect | 4, 1 2, 2
Is the PD a good metaphor for the problem of environmental protection, in your view? • Rule against communication • Repeat play issue • Civil society vs. state of nature • The “Leviathan” solution
Who Regulates?: Federalism National Government why national standards? Local Government Uniformity/efficiency Transboundary pollution Sophistication/ capacity “race to the bottom” local administration proximity to costs and benefits of pollution and its regulation
HYPOTHETICAL: International Manufacturing Corp. (“IMC”) wishes to purchase Atlantic Circuits, a circuit board manufacturer with plants in Mexico, the U.S., and Germany. IMC believes that it can operate the plants more profitably by expanding production and streamlining costs. What sorts of pollution control and permitting requirements must IMC worry about?
Alternative Regulatory Approaches to Pollution Problems • “Command and Control” Regulation • Ex ante proscriptive and prescriptive rules • Enforcement deterrence • 2. Incentives-based Regulation & performance standards • Ends prescribed; means left to firms • Marketable permits and taxes (EU carbon tax; US acid rain program; Kyoto and CO2) • 3. Liability-based approaches (polluter pays) • 4. Information Disclosure • 5. Voluntary Codes
Command and Control Model: Pollution Permitting Standards prescribe how much pollution may be emitted, and under what circumstances, via a permit Air pollution (e.g., US Clean Air Act, or “CAA”) Water pollution (e.g., German water law) Integrated (air, water, land) pollution (e.g., EU IPPC Directive)
Pollution Permitting: What kind of standards? • Technology-based: What amount of pollution control is possible? Feasible? Economical? • Fixed rule-based standards • Relative case-by-case standards • Why use rules? Case-by-case standards? • Environmental Quality-based: How much pollution can the receiving environment take? How much should it take? • Which approach tends to be more stringent, do you think?
CLEAN AIR ACT: A Mix of Quality- and Technology-based Standards CONVENTIONAL POLLUTANTS Particulates SO2 NOx CO Ozone Lead National Ambient Air Quality Standards (“NAAQS”) established by EPA Polluters must get permit.
CLEAN AIR ACT: Conventional Pollutants New and Modified Sources Only
What about water pollution from the IMC/Atlantic plant? • TSS • BOD, COD • Metals • Other toxics – organic solvents
German Federal Water Act (just like the U.S. Clean Water Act): • “a permit for wastewater discharge may not be granted unless such discharge satisfies certain minimum requirements – best available technology – which are to be met everywhere in Germany irrespective of the quality of the waters (uniform emission standards differentiated according to sectors of industry).” • “More stringent requirements, and even bans on discharges, can in individual cases be imposed by water authorities in the light of immission considerations in order to safeguard the water quality envisaged for specific water uses.”
UNEP (2000): “In 1997, Brazil approved a National Law of Hydraulic Resources … assigns management to Watershed Committees and Water Agencies which are required to execute integrated policies with public participation.”
Holistic or integrated approaches • The EU IPPC Directive • Cross-media approach • Mandates national regulation • Permitting • BAT limit values • environmental quality planning and EQ-based limit values, where necessary
The IPPC Directive: Article 4: Member States shall take the necessary measures to ensure that no new installation is operated without a permit… Article 9: The permit shall include emission limit values for pollutants, in particular, those listed in in Annex III, likely to be emitted from the installation concerned in significant quantities, having regard to their nature and their potential to transfer pollution from one medium to another (water, air and land). … the emission limit values … shall be based on the best available techniques, without prescribing the use of any technique or specific technology, but taking into account the technical characteristics of the installation concerned, its geographical location and the local environmental conditions.
The IPPC Directive Article 2, Section 11. 'best available techniques` shall mean the most effective and advanced stage in the development of activities and their methods of operation :- 'available` techniques shall mean those developed on a scale which allows implementation in the relevant industrial sector, under economically and technically viable conditions, taking into consideration the costs and advantages,- 'best` shall mean most effective in achieving a high general level of protection of the environment as a whole.
National standards, applied locally, through individual permits U.S. state environmental agencies German lander environmental agencies BAT/EQ-based air and water pollution standards IMC/Atlantic Circuits
Global Warming: Hypothesized Relationship FUTURE EFFECTS GHG EMISSIONS GLOBAL WARMING Is the climate changing? If so, are GHGs the principal cause? Will the costs of global warming exceed the benefits? Will the benefits of stopping or slowing global warming exceed the costs?
Kyoto Agreement: • schedule of cuts in GHG emissions • Many developing nations not obligated to reduce emissions • Europe vs. U.S. response • Costs for coal
Enforcement • Civil Enforcement • courts • administrative fines • Criminal Enforcement • Should environmental violations be punished as crimes? • When should government use criminal enforcement in response to environmental violations?
UNEP (2000): “[Latin American] laws intended to regulate the use of natural resources often include provisions to punish non-compliance. However, the rules and regulations often include no criminal or administrative sanctions. An exception is the Brazilian Environmental Crimes Law, passed on March 1998, perhaps the most modern legal text focusing on environmental crime. Rules and regulations are hard to enforce because many institutions cannot monitor compliance and systematic enforcement can have negative economic effects.
Enforcement What do you think of the Brazilian environmental crimes law? Is this an appropriate response to environmental violations in Brazil?
Brazilian Environmental Crimes Lawcriminalizes “conduct which causes or may cause damage to the environment,” including: • to kill, hunt, capture or use any animal species • to inhibit the reproduction of animal species • to conduct painful or cruel experiments using animals • to cut trees in forest reserves, to cause damage to such reserves, and to cause forest fires • to extract minerals from public forests without a license. • to damage or destroy Brazil’s cultural heritage
Problem: lack of enforcement and monitoring resources no credible threat of penalty undermines deterrence Response: high profile enforcement cases, to “make an example of” violators. NGO enforcement?
U.S. v. Wilson: • What did Wilson do wrong? How did he violate the law? What was his “guilty act”? • Did he have a “guilty mind”? • Do you worry about criminalizing behavior like Wilson’s? • What if Wilson did not know that he was violating the law?
Hypothetical How should the managers of Atlantic work to minimize the company’s liability for pollution violations? • Uniform worldwide company environmental standards (via company policies)? • Worker training and continuing education (about company policies and legal requirements)? • Compliance auditing? • Environmental management systems?
Economists and the Critique of Command and Control Environmental Regulation • Social Efficiency vs. Cost Minimization • How to maximize social net benefit? • 2. How to achieve a given environmental goal in a least-cost manner? How much pollution to allow? CBA Risk Analysis Marketable Permits take set total pollution. Taxes
To reduce pollution emissions, why prefermarketable permits to the traditional CAA approach? TRADITIONAL APPROACH Regulators want 30TPY emissions reduction Co. A Co. B Co. C 10tpy 10tpy 10tpy @$4/ton @$3/ton @1/ton = pollution reduction cost TOTAL COST = 40 + 30 + 10 = $80/yr.
MARKETABLE PERMITS Regulators want 30TPY emissions reduction Co. A Co. B Co. C @$4/ton @$3/ton @1/ton If each company is allocated pollution rights (permits) equalling last year’s emissions minus 10 tons. They can either spend money to pollute less or buy or sell their existing rights to pollute. C overcomplies (i.e., reduces its pollution by 30 tons) and sells to B and A the “excess” rights to pollute. How much will they pay?
MARKETABLE PERMITS Regulators want 30TPY emissions reduction Co. A Co. B Co. C @$4/ton @$3/ton @1/ton B will be willing to pay up to $30, and Co. A up to $40, for C to shoulder its reduction burden. Co. C, in turn will be willing to do so for less than those amounts (but more than $20 total). Costs incurred = $30 (plus transfers A/BC). This is the approach used to implement greenhouse gas emissions reductions (under the Kyoto Agreement) in Europe, and in the U.S. acid rain program.
Should IMC/Atlantic expect to be involved in emissions trading? Will it have to pay environmental taxes? • GHG trading (Europe vs. elsewhere) • Fossil fuel combustion • GHGs covered • “carbon equivalents” vs. “GWEs” • Kyoto and the CDM
Environmental Taxes: taxes force firms to “internalize” pollution externalities • Carbon or btu taxes • Volumetric wastewater taxes • UNEP (2000): • “In 1997, Brazil approved a National Law of Hydraulic Resources which includes water charges ….”
Environmental Taxes: German Wastewater Charges Act “The Wastewater Charges Act of 1976 (last amended in 1994) provides that a charge shall be payable when wastewater is discharged directly into a body of water. The charge is the first eco-tax levied at the federal level as a steering instrument. It ensures that the polluter-pays principle is applied in practice, since it requires direct discharges to bear at least some of the costs that their use of the environmental medium water involves.”
“Polluter Pays” Liability • What does it mean to “make the polluter pay”? • Who should pay? • one who violated the law by releasing hazardous material to the environment? • What if polluter acted legally? • one who acted carelessly? • What if polluter was careful?
“Polluter Pays” Liability • What does it mean to “make the polluter pay”? • Who should pay? • one who benefited by shifting pollution costs to the environment/society? • Does company who generated wastes always benefit from improper disposal? • One who benefits from cleanup? • Landowner? Does it depend?
EU White Paper on Polluter Pays Liability • “The White Paper concludes that the most appropriate option would be a framework directive providing for strict liability for damage caused by EC regulated dangerous activities, with defences, covering both traditional and environmental damage, and fault-based liability for damage to biodiversity caused by non-dangerous activities.” • No retroactivity. • Who is liable? • What defenses?
EU White Paper on Polluter Pays Liability: Who is liable? “The person (or persons) who exercise control of an activity (covered by the definition ofthe scope) by which the damage is caused (namely the operator) should be the liable party under an EC environmental liability regime. Where the activity is carried out by a company in the form of a legal person, liability will rest on the legal person and not on the managers (decision makers) or other employees who may have been involved in the activity. Lenders not exercising operational control should not be liable.”
EU White Paper on Polluter Pays Liability: What defenses? “Commonly accepted defences should be allowed, such as Act of God (force majeure), contribution to the damage or consent by the plaintiff, and intervention by a third party (an example of the latter defence is the case that an operator caused damage by an activity that he conducted following a compulsory order given by a public authority).”