Environmental Economics: An Introduction PDF

Okay, I'm ready to convert the images into a structured markdown format. Here's the result: # Environmental Economics: An Introduction By Paul BELLEFLAMME, Louvain School of Management ## Table of contents 1. [Rationale](#rationale) 2. [Efficient Abatement Policies](#efficient-abatement-policies)...

Okay, I'm ready to convert the images into a structured markdown format. Here's the result: # Environmental Economics: An Introduction By Paul BELLEFLAMME, Louvain School of Management ## Table of contents 1. [Rationale](#rationale) 2. [Efficient Abatement Policies](#efficient-abatement-policies) 3. [Specific interventions](#specific-interventions) ## Rationale ### Climate change The graph shows the deviation in temperature from the 1961-1990 average (°C) and atmospheric CO2 (parts per million) from 1750 to 2000. * **Particularly difficult environmental problem to handle** * Capping emissions is not enough. * The stock of CO2 matters, not the flow! * May be irreversible. * Requires global cooperation. * Conflicts of interest: between/within countries and generations. * Worst-case scenario is catastrophic. ### Is there a need for public intervention? | Question | Answer | | :----------------------------------------------------------------------------------------- | :------------------------------------------- | | Because of environmental externalities in production / extraction of virgin resources? | ✅ | | Because of information asymmetries? | ✅ | | Because of insufficient incentives for green design, recycling, etc.? | ✅ | | Because of the looming exhaustion of finite resource reserves? | Depends on complex interaction of market failures, technological progress, etc. | ## Efficient Abatement Policies ### Abatement policies #### Definition and examples * Policies designed to reduce environmental damages. * Discover and adopt less-polluting technologies. * Consume fewer or less environmentally damaging goods. * Ban or limit the use of environmentally harmful substances or activities. #### How to design them best? A complex trade-off: | Producing and consuming more | Less-degraded environment | | :---------------------------------------- | :----------------------------------------- | | For current generation | For current and future generations | | Relatively easy to value | Hard to value | | Very different views across economics | | | | COST/BENEFIT ANALYSIS | #### Cost curve Abatement cost (€ per tCO₂e) vs. Abatement potential (GtCO₂e per year) The first graph shows the abatement potential (GtCO2e per year) for various abatement policies between 15 and 35 and abatement costs between 60 and 0. The policies, from most to least effective, are: | Policy | | ------------------------- | | Reduced slash-and-burn agriculture conversion | | Reduced pastureland conversion | | Geothermal | | Grassland management | | Organic soil restoration | | Building efficiency new build | | Second generation biofuels | | Degraded land restoration | | Pastureland afforestation | | Nuclear | | Degraded forest reforestation | | Cars plug-in hybrid | | Low-penetration wind | | Solar CSP | | Solar PV | | High-penetration wind | | Coal CCS retrofit | | Power plant biomass co-firing | | Iron and steel CCS new build| | Reduced intensive agriculture conversion | | Gas plant CCS retrofit | * **Abatement cost curve** * Shows the per-unit cost of abating greenhouse gas emissions using abatement policies, ranked from the most cost-effective to the least (the marginal cost curve). * Each bar = a change that could reduce carbon emissions * Height = Cost of using the technology to reduce carbon emissions, in terms of euros per tonne of reduced CO2 emissions. * Shorter bar → More abatement per euro spent. * Width = Reduction of CO2 emissions, compared to the level without policy intervention. * Wider bar → Higher potential to abate emissions. * Only includes policies that have a cost! * Win-win solutions are not shown here. * Reduce emissions and save money * E.g., insulation of older houses. ### Least-cost curve The second graph plots Environmental quality, E (amount abated, GtCO2) against Cost of abatement (billions € = cost per tonne abated x gigatonnes abated) * Definition It shows all the combinations of environmental quality (E) and cost of abatement when the abatement technologies are adopted in ascending order of cost. * **Interpretation** * Point A is dominated by points A' and A”. * May still be chosen if abatement policies are inefficient (more costly methods are adopted first). * Flipping this curve horizontally gives the feasible set (see next page). #### Choice of abatement level The third graph plots Quality of the environment, E against Consumption of goods and services (billions €). * Shows the tradeoff between consumption and environmental quality * Considers feasible set * Abatement costs = €50 billion * **Marginal rate of substitution** * $=\frac{marginal \ utility \ of \ consumption}{marginal \ utility \ of \ environmental \ quality}$ * Opportunity cost of abatement expenditure * Depends on citizens’ value for the environment * **Marginal rate of transformation** * $=\frac{increase \ in \ environmental \ quality}{decrease \ in \ consumption}$ * Marginal productivity of abatement expenditures * Depends on costs of abatement The next graph shows a dynamic perspective. * Decreases as people adopt 'greener values'. * Increases as greener technologies are developed. #### Effects of technological improvement Enlarge the feasible set by making abatement more efficient or reducing the environmental consumption costs. Increase in the marginal productivity of abatement expenditure (MRT of consumption into abatement), making the feasible frontier steeper. ### Win-win policies * Not always a trade-off between consumption and environmental quality * Some technologies are cost-saving. * e.g., fuel-efficient vehicles, insulation in houses. * This abatement potential means that part of the feasible frontier has a positive slope. * These unexploited mutual gains suggest more is needed than market incentives ### Renewable energy production * Innovation rents can drive progress, leading to technological breakthroughs that deliver substitutes for non-renewable resources. * Subsidies to firms that produce solar panels have helped fund R&D in alternative energy sources. * Growing demand for solar panels led to a sharp decrease in price, thanks to learning by doing in the production process. ## Specific interventions ### Policy instruments * In this presentation * Carbon pricing * Eco taxes * Cap and trade * Deposit-Refund Systems * Extended Producer Responsibility * Other instruments * Product ban * Technical standards * Recycling / recycled content targets * Communication & information campaigns. * Voluntary cooperation agreement (“convenant”) * Green public procurement * Tradable recycling certificates * Alternative business models ### Carbon pricing "Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted." A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it." (World Bank Group) * Carbon taxes (Price-based policy) * Cap and trade (Quantity-based policy) ### Virtues Of Carbon Pricing * **Efficiency** * It encourages those who can eliminate their pollution at a relatively low cost to do so. * It boosts green innovation (the monetization of intellectual property facilitates startups access to financing) * **Simplicity** * It Requires Measuring Emissions But No Other Information. * It Requires measuring emissions but no other information (→ bureaucratic red tape & discretion relative to other methods of reducing pollution ↓) * It empowers consumers to act for the climate as the price they pay for a product captures the cost of all emissions along the value chain * **Fiscal revenues** * Not the first purpose, but the fiscal revenue generated can be used to compensate certain categories of economic agents or fund the green transition. ### Eco taxes Pigouvian tax/subsidy. Graphically * Tax/subsidy on firms generating negative/positive external effects in order to correct an inefficient market outcome Application to climate change * Confront producer/consumer with social cost of products * "Internalize environmental externalities” Cost efficient * Allocation of emission reduction efforts over polluters with different costs of abatement * Cheap reduction cost polluters should do more effort than expensive ones Dynamically efficient * Continuous incentive to reduce emissions further because remaining emissions are taxed ### Examples In the pesticide example, the government puts a per-unit tax on output, equal to the MEC. The tax forces producers to face the full cost of their decisions. The profit-maximising producer chooses output where MPC = after-tax price, which is the socially optimal output. Total typical landfill charge and percentage of MSW landfilled, 2009 vs. Landfill of municipal waste (%) Irish levy on plastic bags (introduced in 2002) vs. Bag as % of litter ### Taxing firms * Taxes can create innovation rents by changing relative prices, which promotes private-sector innovation. * Without a tax, the coal-intensive technology is cheaper (red) * A tax on coal makes solar-intensive technology cheaper (blue lines). * Taxes on firms may make renewable sources of energy relatively more profitable, but also make adoption necessary to stay competitive. #### Impact Taxes can create lifestyle changes that improve well-being by changing how much consumers value goods. Post-tax: $1 = 2km of air travel MRT = 100. vs. Pre-tax: $1 = 4km of air travel 1 hour free time → + 1 hour of work → + $50 of salary → + km of air travel → MRT = 200 slope= wage/price = -(50/0.25) = -200 slope= wage/(price + tax) = -(50/0.5) = -100 ### Cap and trade A cap and trade policy combines a legal limit on the amount of emissions with an incentive-based approach to assigning the abatement required to meet this legal limit among firms and other actors 1. Government sets the total level of abatement required. Called the 'cap', 'Quantity' side of the policy 2. Government creates and allocates permits. The number of permits issued limits total emissions to the size of the cap. Permits can be given or auctioned to polluting firms. 3. Permits are traded. Buyers → Firms for which polluting is profitable and/or abatement is costly. Sellers → Reverse 4. Firms submit permits to government to cover their emissions They must provide one permit for each tonne of emissions produced. ### Model * Firm A has a lower marginal private cost of abatement (MPCA) than Firm B. * Both firms benefit from buying/selling permits until the MPCA is equalized across firms. * Objective of cap and trade = abatement is done by the firms for which this is least costly. * Firms trade until Permit price = MC of abatement (Pareto-efficient). ### Issues Policymakers need to set the correct total level of abatement, Putting a price on pollution may send a wrong signal to firms, making production profitable * EU Emissions Trading Scheme set too large a cap , price reduced dramatically afrter the 2008 crisis, thus reducing incentive to abate. * A price floor( like in the UK) mitigates the issue * Issue: implementation of smart deposit in belgium for drinks containers * Fost Plus has partnered with Feva and Comeos. * Is aimed to unite all parties including public and private entities. * Deposits on cans and plastic bottles from 2025, digital system criticised ### Deposit-Refund System (DRS) * Ideally * We would set the charge for disposal equal to marginal damage. * In reality * Taxes on legal disposal are problematic because they induce illegal waste disposal (littering, midnight dumping, ...) * Would a subsidy for proper sorting/recycling work? * Yes, for optimal sorting efforts * No, for optimal consumption because the sorting subsidy acts as an implicit consumption subsidy, * Solution: * Combine DEPOSIT → Tax to reduce consumption * REFUND → Subsidy to promote sorting * ... and set both rates equal to marginal damage ### Extended Producer Responsibility (EPR) * Producers have little incentive to limit waste or promote recycling of end-of-life products. * Why? Their link with the product vanishes after selling it. * Goal → Incentivize producers for end-of-life phase * Setup regulator sets a recycling targets.Industry sets up a recycling organisation, member pays,recycling sorted materials * Fost plus,private organisation promoting recycling. #### Examples in Belgium: * Spent batteries for example precious metals * High efficacy * Collection target 45 % for european batteries. EPR is a good instrument: it helps make efficient fixed targets Let me know if you need any further assistance.