Lecture 2: Policy instruments 1 Flashcards
(43 cards)
Policies to address problems associated with fuel use should:
1.
2.
3.
- Be effective: exploit all opportunity for reducing env. harm/mobilize private investment in clean tech.
- Be cost-efficient
- Strike the right balance between benefits and costs of env. improvement for the economy (-> maximising the net benefit).
What are the objectives of fiscal instruments?
- They may reduce env. harm
- They may produce revenue gain, which can be used to reduce other taxes that distort economic activity.
- They may then achieve env. protection at lowest overall cost to the economy.
- If fiscal instruments are scaled to reflect env. damage, they avoid either excessively burdening the economy, or, conversely, forgoing socially worthwhile env. improvements.
What are fiscal instruments?
Tools and policies that the government uses to manage their finances, economic activity in the form of fe: taxes, subsidies or government spending.
What do correct taxes do?
They are prices that reflect the true cost to society -> they improve economic efficiency by addressing a market failure.
Which basic 3 components should energy tax systems comprise?
- A charge should be levied on fossil fuels in proportion to their CO2 emissions multiplies by the global damage for those emissions.
- Additional charges should be levied on fuels used in power generation in proportion to the local air pollution emissions from these fuels but with credits for clean energy, given that the net emissions released are what ultimately determine env. damages.
- Additional charges should be levied for local air pollution, accidents, pavement damage attributable to motor vehicles -> preferably according to distance driven (reflecting ALL costs of driving a motor vehicle).
Why is coal use pervasively undercharged?
- Not only for carbon emissions, but also for health costs of local air pollution.
- Correct taxes can yield substantial reduction in pollution-related deaths and in CO2 emissions.
What is a sink function?
The ability of natural environments to absorb wastes and pollution.
What is the optimal level of pollution?
The pollution level that maximises net social benefits.
What is the only way to achieve 0 emission and why is this not feasible?
To have 0 production, an optimal level of production is one where externalities are fully internalised. Resulting in a lower level of production and pollution.
What is Qmax?
When the polluting party is unregulated, the firm has no incentive to take steps back to reduce their emissions.
What will happen when pollution levels are reduced closer to zero?
Then the cost of additional pollution reduction will rise. -> marginal cost will rise.
What will happen to the marginal damage of pollution as the level of pollution rises?
It will start small and will grow as the level of pollution rises.
What is the status at Qmax? (MD/cost)
- Marginal damage of pollution is high
- Cost to reduce pollution is low.
What is a pollution standard?
A regulation that mandates firms to meet a specific pollution level or pollution reduction
What is a pollution permit?
Permit that allows a firm to emit a certain quantity of pollution - tradable
What is a technology based regulation?
it requires firms to implement specific technology or install specific equipment.
What are disadvantages of a pollution standard?
- Inflexible: fixed standard
- Requires all firms to meet the same standard - not cost efficient
- After firms have met their standard, they have little incentive to further reduce pollution.
What are advantages of technology based approach he’s?
- Enforcement and monitoring costs are relatively low
- These approaches do take costs into consideration
- The mandated BACT can change over time as technologies improve
- Cost efficient due to standardization: if all firms must adopt a technology, drives the costs of producing that technology down - becomes cheaper.
What are downsides to technologie based standards?
- They are unlikely to be cost-efficient because they do not provide firms with the flexibility to pursue a range of options.
- BACT regulation may create little incentive for innovation
- Implementation of BACT costs will vary among firms
- Economically not efficient.
What are advantages of a pollution tax?
- The regulation creates a strong incentive for action
- Internalisation of external costs
- Economically efficient
What are downsides to a pollution tax?
- Individual firms are not required to reduce pollution under a market based approach
- Very difficult to predict the total amount of reduction that a given tax will produce
- It depends on the shape of each firms MCR curve, which is usually not known to policy makers.
What is market-based pollution control?
Pollution regulations based on market forces without specific control of firm-level decisions (such as taxes, subsidies and permit systems).
What is MCR?
Marginal cost of reduction: When a firms moves further from Qmax and reduces its pollution, more additional costs are needed.
Which 4 ways are there to control pollution?
- Pigovian tax
- Transferable pollution permits
- Pollution standards
- Technology-based regulations
