Governments should balance the needs of the environment with those of businesses using economic policies which encourage responsible behaviours and ensure value for money. The aim of an economic control is to promote responsible methods and levels of production from firms with acceptable abatement costs – that is, the costs to the company of enacting and sustaining any such changes. Abatement costs vary between firms depending upon current practices, technologies and strategies. Governmental policies must also ensure value therefore enforcement costs must remain minimal such as initial set-up costs and maintenance i.e. enforcement staff and regulatory policies. Two methods are the use of taxes, and the introduction of permits. This article shall give a brief introduction to each.
Taxes
As the clearest and most succinct approach, taxes on pollutants encourage firms to alter their practices, lest they face a charge on those pollutants emitted above certain levels [1]. In setting tax levels, policy makers must find the point where marginal benefit equals the marginal abatement costs for a firm. This point is an indicator of where the tax level should be set; above this point to keep emissions down, or below this point to encourage yet further reductions. Figure one illustrates this:
Figure 1: Marginal Abatement Costs vs Marginal Damages.
In this scenario, reducing the limit of emissions from e0 to e* frees the producer from paying for damages and further abatement costs in areas d, f and g. If the tax is point t*, those producing excessive emissions will be taxed accordingly. The point where the abatement costs meet marginal costs is where the tax should – and is – set. Firms will strive to reduce emissions to reduce the taxes they then pay. This is a simplistic model in offering a “one tax rate for all emissions”.
Whilst taxes offer a simple method for emission regulation, a tax does not consider geographical differences. Simple models assume uniform impacts among polluters however this is not the case in reality. In figure 2 for example, the impact of a firm in zone 2 is considerably greater than that of a firm in zone 3 due to proximity to the population centre (in this example we shall assume zone 1 to be the population centre). A single unit reduction in a pollutant from a firm within zone 2 would have twice the impact of that of a firm in zone 3, therefore the firm in zone 2 could have twice the abatement costs (costs involved to the firm of reducing their emission level) of that firm in zone 3, but the same level of damage reduction. This is a concern which taxes struggle to solve. Such a scheme operates – to an extent – in London in encouraging better practices amongst road users [2]
Figure 2: Zoned emission Charges. Source
Another debate facing policy makers, and in relation to taxes and permits, is the decision to adopt either equi-marginal rule or an equi-proportional approach. Equi-marginal is when all firms must slash their emissions by equal percentages i.e. every firm must reduce emissions by a certain level equally [3]. Equi-proportional approaches are when firms reduce their emissions based on the proportion they emit already, thus providing a more reasonable and fair solution to individual firms [4] i.e. Under the equi-marginal rule, all firms would each cut emissions by the same value. However, according to the principle of equi-proportionality if firm A produces 25% of all pollutants and firm B produces 75%, then firm A should reduce emissions by 25% and firm B by 75%.
Tradable Permits
A tradable permit allows polluters the right to emit one “unit” of pollutant. A central regulator would decide the overall emissions that a country or industry would be allowed to emit in a given year. In an example, imagine the Scottish Government decided to allow 300 tonnes of pollutants to be emitted. It could – assuming it then took responsibility for the initiative – produce 300 permits. Companies can then emit pollutants to the limit of their allowance.
The distribution of permits to polluters remains a cause of debate. Many herald the option of auctioning a share of permits, to allow a base price to be agreed for the remainder. Others argue that distributing permits directly to firms – but below their current emission levels – is the best way forward. Excess permits could be sold either by firms or the central body to encourage a new market of trade and competition and, perhaps, limited extra permits can be purchased from regulators providing additional state funding for re-investment.
The creation of a new market of permit trading has garnered strong support in the U.S [5] known as a “cap and trade” initiative. It offers the potential for firms to trade permits, providing a strong incentive to invest in greener practices and to then have the option of selling excess permits. Permit trading schemes have the potential to provide the desired results, however clear trading rules and regulations must be devised and supervised by a competent body, thus requiring sustained finances to operate this governing body.
[2] http://www.tfl.gov.uk/roadusers/lez/17678.aspx#tkt-tab-panel-1
[3] adapted using http://economicsconcepts.com/law_of_equi_marginal_utility.htm
[4]adapted using http://opensiuc.lib.siu.edu/cgi/viewcontent.cgi?article=1013&co ntext=econ_dp&sei-redir=1#search=%22equi-proportional%20rule%22
