Lecture 4 Environmental Economics PDF 2024/2025

1 / 39 0605-1725 Environmental Economics Dr. Obbey Department of Economics...

1 / 39 0605-1725 Environmental Economics Dr. Obbey Department of Economics Elamin MSc. Applied Energy Economics Objectives 2024/2025 1st semester Pollution Control—A General Model 0605-1725 Pollution Damages Environmental Economics Abatement Costs Lecture 4 The Socially The Economics of Environmental Quality Efficient Level of Emissions The Equimarginal Principle Applied to Dr. Obbey Ahmed Elamin Emission Reductions [email protected]  2 / 39 Objectives 0605-1725 Environmental Economics ▶ Identifying the most appropriate level of Dr. Obbey Elamin environmental quality we ought to try to achieve. ▶ Dividing the task and costs of meeting environmental Objectives Pollution quality goals. Control—A General Model ▶ Distributing benefits and costs across society Pollution appropriately. Damages Abatement Costs The Socially This lecture is from: Efficient Level of Emissions Chapter 5 (pages 79-103) in Field, B. C. & Martha, K. The Field (2017). Environmental Economics: An Introduction. Equimarginal Principle McGraw-Hill Book Company (UK) Ltd. Applied to Emission Reductions  3 / 39 Pollution Control—A General Model 0605-1725 Environmental Economics Dr. Obbey Elamin ▶ On the one hand, reducing emissions Objectives Pollution reduces the damages that people suffer Control—A General Model from environmental pollution. Pollution Damages ▶ On the other hand, reducing emissions Abatement Costs takes resources that could have been used The Socially Efficient Level in some other way. of Emissions The Equimarginal Principle Applied to Emission Reductions  4 / 39 Pollution Damages 0605-1725 Environmental Economics Damages: All the negative impacts that users of the Dr. Obbey environment experience as a result of the degradation of Elamin that environment. Objectives Pollution Air pollution produces damage through its impacts on Control—A General Model human health. Excess deaths from diseases such as lung Pollution cancer, chronic bronchitis, and asthma are related to Damages elevated levels of various pollutants, such as particulate Abatement Costs matter, asbestos fibers, and radon emissions. The Socially Efficient Level of Emissions Table 5.1 shows the range of estimated damages reduced The (i.e., benefits) in the United States for a major part of the Equimarginal Principle Clean Air Act. It includes projection of benefits to the Applied to Emission year 2020. Reductions  5 / 39 Pollution Damages 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  6 / 39 Damage Functions 0605-1725 The greater the pollution, the greater the Environmental Economics damages it produces. Dr. Obbey Elamin A damage function shows the relationship between the Objectives quantity of a residual and the damage that residual Pollution causes. Control—A General Model Pollution There are two types of damage functions: Damages 1. Emission damage functions: These show the Abatement Costs connection between the quantity of a residual The Socially emitted from a source or group of sources and the Efficient Level of Emissions resulting damage. The Equimarginal 2. Ambient damage functions: These show the Principle Applied to relationship between the concentration of particular Emission Reductions pollutants in the ambient environment and the resulting damages.  7 / 39 Damage Functions 0605-1725 Environmental Economics Dr. Obbey Elamin Marginal damage function shows the change in damages stemming from a unit change in emissions or Objectives ambient concentration. Pollution Control—A General Model Figure 5.1. The top two are marginal emission damage Pollution Damages functions; Abatement The horizontal axes measure the quantity of an effluent Costs emitted into the environment during some specified The Socially Efficient Level period of time. of Emissions The The vertical axes measure environmental damages. Equimarginal Principle Applied to Emission Reductions  8 / 39 Pollution Damages 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  9 / 39 Damage Functions 0605-1725 Environmental Panel (a) shows marginal damages increasing only Economics modestly at the beginning but more rapidly as emissions Dr. Obbey Elamin get larger and larger. Objectives Panel (b) marginal (emission) damage function that has Pollution Control—A the same general shape as panel (a), but it begins much General Model higher on the vertical axis and rises more sharply. Pollution Damages Abatement Panel (c) and panel (d) are marginal ambient damage Costs functions. The Socially Efficient Level of Emissions Panels (a) and panel (d) have thresholds; values of The Equimarginal emissions or ambient concentrations below which marginal Principle Applied to damages are zero. The pollutant can increase to these Emission Reductions threshold levels without causing any increase in damages  10 / 39 Marginal Damage Functions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  11 / 39 Marginal Damage Functions When the effluent level is at the point marked e1 the 0605-1725 Environmental marginal damages are $12. Economics Dr. Obbey Elamin If emissions were to increase (decreased) by 1 ton from point e1 , the damages experienced by Objectives people exposed to those emissions would in- Pollution Control—A crease (decrease) by $12. General Model Pollution Damages For marginal damage function M D1 , total damages Abatement are equal area b. Costs Marginal damages are higher for M D2 than for M D1. The Socially Efficient Level of Emissions At emission level e1 , a small increase in effluent The would increase damages by $12 if the marginal Equimarginal Principle damage function were M D1 , but it would increase Applied to Emission damages by $28 if it were M D2. Reductions The total damages are equal to is area (a + b) when the damage function is M D2.  12 / 39 Marginal Damage Functions 0605-1725 Environmental Economics Dr. Obbey Elamin Some factors that move damage functions upward are: Objectives a. Differences in population exposed, such as more Pollution Control—A people. General Model b. Different time periods, such as a temperature Pollution Damages inversion that traps the pollutant over the city and Abatement produces relatively high ambient concentrations. Costs The Socially c. New scientific estimates of increased pollution Efficient Level of Emissions impact. The Equimarginal Principle Applied to Emission Reductions  13 / 39 Damages and Uncertainty 0605-1725 Environmental There is a lot of uncertainty about the connections Economics between pollution emissions and various types of Dr. Obbey Elamin damage: Health impacts on humans, ecosystem damages, and so on. Objectives Uncertainty in: Pollution Control—A ▶ The relationship between emissions and ambient General Model environmental conditions, Pollution Damages ▶ In human reaction affects the damages that result. Abatement Costs Damage functions are reversible. If emissions The Socially increase, damages increase; and if emissions decrease, Efficient Level of Emissions damages will go back to their previous level. The Environmental economists, in cooperation with Equimarginal Principle environmental scientists, epidemiologists, and the Applied to Emission like, have worked to develop means by which damage Reductions functions can be measured with greater accuracy.  14 / 39 Damages and Time 0605-1725 Environmental Economics Many pollutants are persistent; once emitted they remain Dr. Obbey in the environment for many years, potentially causing Elamin damage far off into the future. Objectives ⇒ Greenhouse gases. Pollution Control—A General Model L Health and ecological impacts may result from Pollution long-term exposure to pollutants. Damages L This creates problems in estimating damage Abatement Costs functions: Being able with reasonable accuracy to The Socially predict what future damages will be from current Efficient Level of Emissions emissions. The Equimarginal L Brings up the problem of how we should compare Principle Applied to future damages to current damages. Emission Reductions  15 / 39 Abatement Costs 0605-1725 Abatement costs are the costs of reducing the quantity Environmental Economics of residuals being emitted into the environment, or of Dr. Obbey lowering ambient concentrations. Elamin Objectives Normally differ from one source to another, depending on Pollution a variety of factors. Control—A General Model Pollution Damages The costs of reducing emissions of SO2 from elec- Abatement Costs tric power plants obviously will be different from The Socially the costs of reducing, say, toxic fumes from chem- Efficient Level of Emissions ical plants. The Equimarginal Principle Applied to Even for sources producing the same type of effluent, the Emission Reductions costs of abatement are likely to be different because of differences in the technological features of the operation.  16 / 39 Abatement Cost Functions Marginal emission abatement costs show the added 0605-1725 Environmental costs of achieving a one-unit decrease in emission level, or Economics alternatively the costs saved if emissions are increased by Dr. Obbey Elamin a unit. Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions For somewhat larger reductions, the marginal costs actually may decline as it becomes possible to utilize these techniques more fully.  17 / 39 Abatement Cost Functions 0605-1725 Environmental Figure 5.3 shows three alternative marginal abatement Economics cost functions. Dr. Obbey Elamin Panel (a) depicts marginal abatement costs rising very Objectives modestly as emissions are first reduced, but then rising Pollution Control—A very rapidly as emissions become relatively small. General Model Pollution Damages Panel (b) shows marginal abatement costs that rise Abatement rapidly from the beginning. Costs The Socially Efficient Level Panel (c) shows a marginal abatement cost curve that of Emissions has an initial declining phase, followed by increasing The Equimarginal values; this might characterize a situation in which small Principle Applied to reductions can be handled only by technical means that Emission Reductions require a substantial initial investment.  18 / 39 Abatement Cost Functions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  19 / 39 Abatement Cost Functions 0605-1725 ▶ If emissions are currently at e tons per year, the Environmental Economics value on the vertical axis shows the marginal cost of Dr. Obbey achieving one more unit of emission reduction. we Elamin are reading the graph from right to left Objectives ▶ The area under the marginal abatement cost curve, Pollution between its origin at point e and any particular Control—A General Model emission level, is equal to the total costs of abating Pollution Damages emissions to that level. Abatement ▶ The curve labeled M AC2 , the total abatement cost Costs of achieving an emission level of e tons per year is The Socially Efficient Level equal to the area under the curve between e and e, of Emissions the area (a + b). The Equimarginal Principle ▶ At e tons per year of emissions, for example, the Applied to Emission marginal costs of abating an extra ton are only c2 in Reductions the case of M AC1 , which are substantially lower than the marginal abatement costs of M AC2 at this point.  20 / 39 Abatement Cost Functions 0605-1725 Environmental M AC1 and M AC2 could be Economics Dr. Obbey Different sources. Elamin  A plant that was built many years ago and another Objectives that was built more recently and uses different Pollution production technology. Control—A General Model  The same pollutant and the same source, but at Pollution Damages different times. The lower one represents the Abatement situation after a new pollution-control technology has Costs been developed, whereas the upper one applies before The Socially Efficient Level the change. Before the firm adopted the new of Emissions technology, its total abatement cost of achieving The Equimarginal effluent level e was equal to (a + b) per year, whereas Principle Applied to after the change, the total abatement costs are b per Emission Reductions year.  21 / 39 Abatement Cost Functions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Technological change results in a lowering of the Pollution marginal abatement cost curve for a given pollutant. Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  22 / 39 Aggregate, Marginal Abatement Costs 0605-1725 Environmental Economics Dr. Obbey Most environmental policies, especially at state or federal Elamin levels, are aimed at controlling emissions from groups of Objectives pollution sources, not just single polluters. Pollution Control—A General Model The abatement cost function shows the least costly way of Pollution Damages achieving reductions in emissions for an individual firm if Abatement we are looking at an individual marginal abatement cost Costs function, or group of polluting sources if we are The Socially Efficient Level considering the aggregate marginal abatement cost of Emissions function. The Equimarginal Principle Applied to Emission Reductions  23 / 39 Aggregate, Marginal Abatement Costs Figure 5.5 shows, on the left, two individual marginal 0605-1725 Environmental abatement cost functions, labeled Source A and Source B Economics (not the same but the same pollutant). Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions The aggregate marginal abatement cost curve is a summation, or aggregation, of these two individual relationships.  24 / 39 Aggregate, Marginal Abatement Costs The principle to follow is to add together the two 0605-1725 Environmental individual functions in such a way as to yield the lowest Economics possible aggregate marginal abatement costs. Dr. Obbey Elamin The way to do this is: Objectives ▶ Select a particular level of marginal abatement Pollution cost—for example, the one marked w. Control—A General Model ▶ Marginal abatement cost is associated with it is 10 Pollution Damages tons/week from Source A and 7 tons/week from Abatement Source B. Costs ▶ Marginal abatement cost of w would be associated The Socially Efficient Level with an effluent level of of Emissions The 10 tons + 7 tons = 17 tons/week Equimarginal Principle Applied to ▶ All the other points on the aggregate marginal Emission Reductions abatement cost curve are found the same way, by summing across horizontally on the individual marginal abatement cost curves.  25 / 39 The Socially Efficient Level of Emissions 0605-1725 Environmental The efficient level of emissions is defined as that level at Economics which marginal damages are equal to marginal abatement Dr. Obbey Elamin costs. Objectives Lower emissions involve society in greater costs in the Pollution Control—A form of resources devoted to abatement activities. General Model Pollution Damages The efficient level of emissions is thus the level at Abatement Costs which these two types of costs exactly offset one The Socially another—that is, Efficient Level of Emissions The Equimarginal Principle Where marginal abatement costs equal Applied to marginal damage costs. Emission Reductions  26 / 39 The Socially Efficient Level of Emissions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission This is emission level e∗ and to the value w at this level of Reductions emissions.  27 / 39 The Socially Efficient Level of Emissions 0605-1725 Environmental Economics ▶ The triangular area marked a (bounded by points eb Dr. Obbey and e∗ and the marginal damage function) depicts the Elamin total damages existing when emissions are at level e∗. Objectives ▶ The triangular area b shows the total abatement Pollution Control—A costs at this level of emissions e∗. General Model Pollution ▶ The sum of these two areas (a + b) is a measure of Damages the total social costs from e∗ tons per year of this Abatement Costs particular pollutant. The Socially ▶ The point e∗ is the unique point at which this sum is Efficient Level of Emissions minimized. The Equimarginal ▶ Note that the size of area a need not equal the size of Principle Applied to area b. Emission Reductions  28 / 39 The Socially Efficient Level of Emissions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal e∗depicts the efficient level of emissions and w shows Principle Applied to marginal damages and marginal abatement costs at that Emission Reductions quantity of emissions.  29 / 39 The Socially Efficient Level of Emissions Panel (a): Shows a pollutant for which e∗ is well to the 0605-1725 Environmental Economics right of zero. Marginal damages at this point are quite Dr. Obbey small; so are total damages and abatement costs, as Elamin shown by the small size of the triangles corresponding to Objectives these values. Pollution Control—A Panel (b): At e∗ total abatement costs are substantially General Model Pollution higher than total damages, as is indicated by the relative Damages sizes of the triangles that measure these total values (a Abatement Costs and b). This emphasizes is that it is not the equality of The Socially total abatement costs and total damages that defines the Efficient Level of Emissions efficient level of effluent, but the equality of the marginal The abatement costs and marginal damages. Equimarginal Principle Applied to Emission Panel (c): The efficient level of emissions is zero (area a Reductions does not appear on the graph). What makes e∗ = 0 is that the marginal damage function doesn’t begin at zero  30 / 39 Changes in the Efficient Level of Emissions 0605-1725 Environmental Economics Dr. Obbey The real world is a dynamic place, the level of emissions Elamin that was efficient last year, or last decade, is not Objectives necessarily the level that is efficient today or that is likely Pollution Control—A to be in the future. General Model Pollution Damages Change in factors that lie behind the marginal damage Abatement and marginal abatement cost functions, the functions Costs shift and e∗ will change. The Socially Efficient Level of Emissions Figure 5.8 shows several ways in which e∗ might change The Equimarginal when underlying factors change. Principle Applied to Emission Reductions  31 / 39 The Socially Efficient Level of Emissions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  32 / 39 Changes in the Efficient Level of Emissions 0605-1725 Environmental Economics Dr. Obbey Elamin Panel (a) shows the results of a shift upward in the Objectives marginal damage function, from M D1 to M D2. One of Pollution Control—A the ways this could happen is through population growth. General Model Pollution Damages More people means that a given amount of effluent will Abatement cause more damage. Costs The Socially The efficient level of emissions drops from e∗1 to e∗2. Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  33 / 39 Changes in the Efficient Level of Emissions 0605-1725 Panel (b) shows the case of a shift in the marginal Environmental Economics abatement cost function, from M AC1 to M AC2. Dr. Obbey Elamin Could be caused by a change in the technology of Objectives pollution control. Example: development of new Pollution treatment or recycling technologies that make it less Control—A General Model costly to reduce the effluent stream of this particular Pollution pollutant. Damages Abatement Costs This leads to a reduction in the efficient level of emissions, The Socially as indicated by the change from e∗1 to e∗2. Efficient Level of Emissions The Before the change, total abatement costs were an amount Equimarginal Principle equal to the area (a + b). Applied to Emission Reductions After the change, total abatement costs are equal to area (b + c).  34 / 39 Enforcement Costs 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle Applied to Emission Reductions  35 / 39 Enforcement Costs 0605-1725 Environmental Economics Dr. Obbey Elamin ▶ The vertical distance between the two marginal cost Objectives curves equals marginal enforcement costs. Pollution Control—A ▶ The assumption drawn into the graph is that General Model marginal enforcement costs, the added costs of Pollution Damages enforcement that it takes to get emissions reduced by Abatement a unit, increase as emissions decrease. Costs The Socially ▶ The more polluters cut back emissions, the more Efficient Level of Emissions costly it is to enforce further cutbacks. The Equimarginal Principle Applied to Emission Reductions  36 / 39 The Equimarginal Principle Applied to Emission Reductions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives ▶ If there are multiple sources of a particular type of Pollution Control—A pollutant with differing marginal abatement costs, General Model ▶ If it is desired to reduce aggregate emissions at the Pollution Damages least possible cost (or, alternatively, get the greatest Abatement Costs reduction in emissions for a given cost), The Socially ▶ Emissions from the various sources must be reduced Efficient Level of Emissions in accordance with the equimarginal principle. The Equimarginal Principle Applied to Emission Reductions  37 / 39 The Equimarginal Principle Applied to Emission Reductions 0605-1725 Environmental Economics Dr. Obbey Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Costs The Socially ▶ If neither source makes any effort to control Efficient Level of Emissions emissions, they will each emit 12 tons/week (total The emissions 24 tons/week). Equimarginal Principle ▶ We want a total reduction of 50 percent ⇒ each Applied to Emission source is required to reduce by 50 percent. Reductions ▶ If Source A marginal abatement costs would be $6,000/week, Source B would be $20,000/week.  38 / 39 The Equimarginal Principle Applied to Emission Reductions 0605-1725 Environmental Economics Dr. Obbey Total abatement costs Elamin Objectives Pollution Control—A General Model Pollution Damages Abatement Equiproportionate reduction violates the equimarginal Costs principle; marginal abatement costs. The Socially Efficient Level of Emissions The An emission reduction plan that follows the Equimarginal Principle equimarginal rule gives emission reduction at Applied to Emission minimum cost. Reductions  39 / 39 The Equimarginal Principle Applied to Emission Reductions 0605-1725 Environmental Economics Dr. Obbey Elamin What is required is different emission rates for the two sources, where, simultaneously, they will emit no more Objectives than 12 tons of effluent and have the same marginal Pollution Control—A abatement costs (10). General Model Pollution Damages Abatement Costs The Socially Efficient Level of Emissions The Equimarginal Principle The desired reduction in total emissions has been Applied to Emission obtained, but with a savings of $16,000/week over the Reductions case of anequiproportionate reduction.