Nearly all environmental policies include two key decisions (both components in practice are typically linked):

A. Setting the goal or target

B. Selecting the means or instrument to achieve the target

Stavins (1998)

Policy for market failure

Setting the goal – Characterizing benefits from reducing damages

• Interpret area b, a, & (a+b)

• Shift: interpret the difference between MD1 and MD2. (more to come)

• What is the efficient/ optimal level of emissions? Is there enough information?

Field and Field, 2006

• Interpret area b, a, & (a+b)

• Shift: interpret the difference between MD1 and MD2. (more to come)

• What is the preferred level of emissions? Do we have enough information?

Field and Field, 2006

Setting the goal – Characterizing costs of abatement (reducing damages)

Uncontrolled emissions

• MD curve does not pin down the uncontrolled level of emissions.

MD

(emissions, tons/yr)

$

MAC

e

$

e’• MAC curve does say something

about the uncontrolled level of e. MAC becomes positive when abatement begins, thus the uncontrolled emission level is e’.

• <assume: no free lunch>

e

Identify:

• Efficient level of emissions– Point of minimized total costs: TC

= TAC+TD

– Apply equimarginal principle.

– AT the efficient level, identify:– MD of the last unit of

emissions

– TAC: Total abatement cost

– TD: Total damage

A. Setting the goal: identifying an efficient target

(CRS, 2014)

(Hahn and Sunstein)

Arsenic case study, stated goal: find “the level that best maximizes health risk reduction benefits” while “…satisfy(ing) the statutory requirements of…SDWA” (Averil, 2003, 8).

EPA’s Section-by-section summary of the Safe Water Drinking Act Laws & Statutes: “When EPA proposes an MCL (maximum contaminant level), EPA must publish a determination as to whether the costs of the standard are justified by the benefits.

While some advocate for maximizing net benefits (efficiency), in practice at the federal level that is not always the expressed statutory goal.

B. Selecting the means: Instrument taxonomy

There is no policy panacea

• “(N)o individual policy instrument…is appropriate for all environmental problems.”

• The best instrument depends on – characteristics of the particular environmental

problem– social, political, and economic context

• The policy challenge: selecting the best instrument for the particular setting.

Stavins (1998)

Criteria for evaluation of public policies

a. Cost-effectiveness

b. Incentives for technological innovation

c. Enforceability

d. Fairness/equity/distribution

e. Agreement with moral precepts

f. Political feasibility

a. Cost-effectiveness:

Fix the costMaximize the outcome

informally: “most bang for the buck”

OR

Fix the outcomeMinimize the cost

Cost effectiveness is an ideal that isn’t always met

• Direct cost of federally mandated environmental quality regulations in 1997: ~ $147 billion (OMB, 1997 via Hahn, 2000)

• “(M)any environmental regulations would not pass a standard benefit-cost test” (Hahn, 2000)– E.g.: reallocation of expenditures could save an estimated

60,000 additional lives/yr

Cost effective conservation• Habitat preservation (6.4% of land is in some form of

protected areas management [UNDP, 2000])– Classic question: how can the greatest

conservation return be achieved given limited resources?

• Reserve (conservation) site selection problem -- strategies:– “hotspots”: choose sites w/greatest number of species. – “greedy algorithm”: start w/site w/most species; pick those that add

greatest complement of unprotected species until budget exhausted.– “cost-effective”: choose sites to max. species covered for a given

budget

Cost effective reserve site selection strategies

“Simple example”: •4 potential sites, A through D•2 can be included in a reserve network (“a fixed budget”)•Species 1 through 6, which inhabit each site, are listed in the column for that site.•Objective: maximize total number of species conserved.

Polasky and Solow (1999)

Cost effective reserve site selection strategies

HotspotsGreedy

Cost-effect.Strategies:•“hotspots”: choose sites w/greatest number of species. •“greedy algorithm”: start w/site w/most species; pick those that add greatest complement of unprotected species until budget exhausted.•“cost-effective”: choose sites to max. species covered for a given budget

Newbold & Siikamäki (2009)

Prioritizing conservation activities using reserve site selection methods and population viability analysis.

Ecological Applications, 19(7), 1774-1790.

•PVA: population viability analysis•salmon stocks •upper Columbia River basin (N. central Wash.)•upstream watershed protection•prioritize watersheds for habitat improvement to reduce pollution loading

photo: USFWS

spawning & rearing

H/c = crude b/c ratioΔp/c = b/c ratio

p

prioritizing based solely on costs performs worse than random selection

prioritizing based solely on “benefits” performs better than random selection

prioritizing based solely on rough B/C ratio performs better than random but worse than B alone…

updated B/C ratios performs best. (i.e. select site, then recalculate B/C of remaining sites)

b. Technological change (a component of cost eff.)

• Policies can provide incentives to reduce the marginal abatement cost.

MAC

e

$

e0

A

B

e1(Princeton library)

Innovation/R&D implications of policy• Why care about innovation?

– Expected costs of environmental regulation (e.g. pollution control) are a major barrier to action.

– Adoption of innovative technology can increase cost effectiveness:

• (1) increase pollution control for the same cost, or • (2) decrease cost for the same level of pollution control

– The optimal level of pollution control increases

• Example: regulatory history for nitrogen oxides (NOx) pollutant emissions – stationary sources (primarily coal-fired power plants)– NO2: one of the six criteria pollutants regulated by the 1970

Clean Air Act (National Ambient Air Quality Standards set to protect health and welfare)

Nitrogen oxide (NO and NO2) pollutant hotspots lie above cities and shipping lanes (emitted from engines, power plants, pulp mills)

Effects: long-term NO2 exposure may decrease lung function and increase the risk of respiratory symptoms (World Health Organization).

(From New Scientist. Image: University of Heidelberg)

1970: Clean Air Act1977: CAA amendments1990: CAA amendments1994: Title I: OTC NOx Budget Program(more)…

Nitrogen oxides (NOx): Policy, innovation and emissionsSource: Yeh et al. (2005)

c. Enforceability (a component of cost eff.)• Ease/cost of monitoring and of

sanctioning violators •Often costly to assess compliance.

Claims don’t always reflect reality

“Another trade-off society faces is between efficiency and equality.  •Efficiency means that society is getting the maximum benefits from its scarce resources.  •Equality means that those benefits are distributed uniformly among society's members...•These two goals often conflict...

(Mankiw 2008)

…when the government tries to cut the economic pie into more equal slices, the pie gets smaller.”

• Policy burden… – increases with income

progressive– decreases with income

regressive

Artist Hans Hemmert: shoe-extenders for uniform heightd. Fairness/equity/distribution

“The inherent vice of capitalism is the unequal sharing of the blessings.

The inherent blessing of socialism is the equal sharing of misery.”

-Winston Churchill

(Drawing by Lyn Ott , 1942)

e. Agreement with moral precepts• Whether a policy seems to violate accepted

moral standards

• E.g. subsidies may violate many people’s feelings about who should bear the cost of environmental improvement

• Concepts like the “polluter pays” principle have moral foundations• Though not necessarily clear cut (e.g.

Coasian counter-framing)

Counterpoint to interventionist perspective

Government Failure: when a policy intervention make matters worse rather than better

“There is always an easy solution to every human problem—neat, plausible, and wrong.”

– H. L. Mencken

“The cause of most problems is solutions.”

– Eric Sevareid

The specter of unintended consequences: the cobra effect

A term promoted by (late) German economist Horst Siebert

Origin: Colonial British government in Dehli

The specter of unintended consequences: Why are my Chuck Taylors fuzzy?

US patent 6430844

h/t: gazetc.com

Optional slides

Reserve site selection – attending to cost

• Dobson et al. (1997): endangered species hotspots occurred largely along the coast of California and in Hawaii. – Spots coincide with real estate hotspots (some of the most

expensive real estate in the U.S.)

• Ando et al. (1998): choosing sites that are not necessarily the most biologically rich sites but have a high species per dollar ratio is a cost-effective conservation strategy. – resulted in the same number of endangered species in selected

sites at one-third to one-half the cost of an approach that included the biologically richest sites regardless of cost.

Examples of alternative MD functions

Note: • Emissions or

effluent (rate) vs. ambient concentration (level)

• Slope

• Relation to total damages

Marginal damage function

Examples of alternative MAC functions

Government Failure• Minerals Management Service (M.M.S.) -- in charge of offshore

drilling)• M.M.S behavior in last decade

– let oil companies shortchange government on oil-lease payments, – accepted gifts from industry reps– literally slept with the people they were regulating.

• Industry protested against proposed regulations (including rules that might have prevented the B.P. blowout) M.M.S. backed down.

• A few weeks after B.P.’s Deepwater Horizon oil rig blew up…Ken Salazar, the Secretary of the Interior, ordered the breakup of the M.M.S.”

Surowiecki, James. (2010). The Regulation Crisis. The New Yorker, June 14.