Environmental Science (Economics Module) PDF

# Environmental science (Economics module) - Course code: HS 200/HS250 - Prof. Haripriya Gundimeda - Department of Economics - Indian Institute of Technology Bombay ## Module 3: How do we solve Environment Problems? ### Can we solve the environmental problems? - **Answer is:** Internalize the E...

# Environmental science (Economics module) - Course code: HS 200/HS250 - Prof. Haripriya Gundimeda - Department of Economics - Indian Institute of Technology Bombay ## Module 3: How do we solve Environment Problems? ### Can we solve the environmental problems? - **Answer is:** Internalize the Externality ### How? - Economic Incentives and disincentives - Using various Policy Instruments ## **First Approach** - **Proposition:** Lack of Property Rights leads to the negative externality. - **Solution:** Create Property rights (Robert Coase). - **Example:** If there were private ownership of air, then people would have to buy the right to pollute it with smoke. - If ownership rights of a city's air (e.g., Delhi or Chennai or Kanpur etc.) is given to (or owned by) individuals, then vehicle owners will have to pay these individuals to pollute. ## 2. How do Policy Instruments work? - Standard externality argument - Polluter pays principle For example, suppose users of polluting transport are forced to pay an amount equivalent to the environmental cost. In that case, it will result in cleaner vehicles and smaller traffic volume, reducing air pollution. ## Environmental Policy Instruments * Classified according to * How much pollution to abate? * Price Rationing (increases the cost of shirking) * Quantity Rationing (sets the acceptable levels of pollution) * Liability Rules (socially acceptable benchmark and behaviour) ## Economics of Vehicular Pollution Control – Externality Diagram This diagram shows the relationship between the marginal private costs of driving and the marginal social costs of driving. The marginal private costs are the costs that are incurred by the driver, such as the cost of fuel and the cost of maintaining the vehicle. The marginal social costs are the costs that are incurred by society as a whole, such as the cost of air pollution and the cost of congestion. The diagram shows that at the optimal level of traffic, the marginal social costs are equal to the marginal private costs. However, in the real world, the marginal social costs are often higher than the marginal private costs because drivers do not take into account the costs that they impose on others. This leads to an inefficient level of traffic. In order to improve the efficiency of traffic, it is necessary to internalize the externality, which means to make drivers pay for the costs that they impose on others. This can be done through a variety of policy instruments, such as pollution taxes, congestion charges, and emissions standards ## Economic or Market Based Instruments **Economics** | **CAC or Regulations** | **Economic or Market Based Instruments** | **Involving Participation** ---|---|---|--- **i** | **1) Standards** | **Using Markets** | | | MINAS, Product and Process standards | • Charge Systems - | **1) Voluntary agreements** | | | effluent charges; | | | | user charges; | | | | product charges; | | | | administrative charges; | | | | impact fees | | | **2) Bans** | • **2) Fiscal Instruments or Environmental Taxes** | **2) Public Participation** | | | - pollution taxes; | | | | - input taxes; | | | | - aid in installing new technology; | | | | - subsidies for environmental R&D | | | **3) Permits/ quotas/ license** | • **3) Financial Instruments** | **3) Information disclosure** | | | - financial subsidies; | 3) International offset systems | | | | - soft loans and grants | | | | | **4) Deposit-refund systems and environmental performance bonds** | **4) Liability insurance legislation** | **4) Two-tier monitoring** | | | | | | | | **Creating Markets** | | | | | **1) Property rights / decentralisation** | | | | | **2) Tradeable permits / rights** | | | ## Colour Labels used in PROPER (program for environmental evaluation and training) | Rating | Technical Requirements | |---|---| | Gold | World Class clean technology <br> Waste minimization & polln prevention measures | | Green | > legally required standards for env. Protection <br> Good maintenance and environmental work | | Blue | At legally required standards | | Red | < legally required standards | | Black | Serious environmental damage – no polln control |