international dimensions of regulation developing countries need special attention global pollutants...
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International Dimensions of Regulation
Developing countries need special attention
Global pollutants particularly tough to control
Green Accounting
Double Dividend
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Motivation
Group Project: Treaty proposed to free up trade between US and Guatemala. What restrictions should we put in place to avoid environmental degradation in Guatemala?
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Income effect
Why are oil refineries in poor areas? Why do poor countries have weak
environmental regulations? Can we expect environmental
regulations to weaken or tighten over time in the US or any country?
[Similar questions as when we considered environmental justice.]
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Luxury, Normal and Inferior Goods
Income
Amount of Env. Qual.Demanded(at fixedPrice)
Inferior Good
Luxury Good(Elast > 1)
Normal Good(Elast <1)
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Larry Summers Memo
What was Summers suggesting? What are the arguments in support of
his position? What are the arguments against his
position?
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GATT and the Environment
GATT (General Agreement on Tariffs and Trade) says: You can place border restrictions on the quality of a product (ie, no
chunks of Flipper in the can of tuna) You cannot place restrictions on how the product was produced (you
cannot prohibit use of hormones in raising beef if no hormones can be detected in the imported beef)
Allows environmental restrictions (eg, protecting dolphins) if the restriction allows country to choose methods that provide equal levels of environmental protection – ie, not technology standards
What are the reasons for these rules? Do they work in providing environmental protection? Why did US lose the Venezuelan Refinery Case (Sanger article)?
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Dynamics of Environmental Protection
Environmental Quality
Price
Shifts with increases in income.
Demand
Supply
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Environmental Kuznet’s Curve
Income
SulfurEmissions
Early phases of economicgrowth tend to increase pollution
As income rises, cleanenvironment is valued more, emissions decline
But very difficult to estimatedue to lack of time series
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Reasons for failure of EKC
Corruption – bribe officials to locate hazardous waste sites
Nondemocratic regimes – preferences of population not represented in environmental regulations
Poorly educated population Not all pollutants have same shape
EKC
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Back to Group Project
What are some answers to our original group project problem? Do we need to put into place safeguards so
that Guatemala doesn’t become dumping ground due to corrupt officials?
Should we worry about differences in regs between US and Guatemala, at least in the short-run?
Will increases in income in Guatemala tend to increase env quality?
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Transboundary Environmental Problems
Who fixes environmental problems that cross national borders?Stratospheric ozone depletionGlobal Warming/climate changeGlobal species destruction (sea
turtles) Need IEA’s: International
Environmental Agreements
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The Card Game Analogy
SETUP: Each player is given two cards: one red and one black PLAY: Each player will anonymously hand in one card to Center
(i.e., to Prof.) PAYOFF to each participant after play of game:
10 Environmental Currency Units (ECU) for a red card in your hand 1 ECU for each participant for each red card Center holds Maximum payoff: (N-1)+5 [where N = # participants] Ex: 51 players: the maximum payoff is 60
REWARD: Anyone scoring over 35 gets a Kiss®!
YOUR TASK: figure out what to hand in to the Center
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Choose Your Strategy
Hand in your red card? It yields less to you than if you keep it It yields far more to the group than if you keep it. Society wants you to hand in your red card
Keep your red card? It is worth far more to you in your hand Your payoff will be higher; society’s lower
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Results
This experiment has been run many times typically ⅓ -- ⅔ of people hand in their red card Refer to Scott Barrett (2003)
When repeated with the same group, cooperation (handing in the red card) tends to decline
Analogous to transboundary environmental problems Fundamental conflct between individual and group interests Self-interest diverges from group interest Powerful incentives to shirk your responsibility
Understanding how to solve card problem gives insight into solving transboundary environmental problems
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Can an Agreement Solve Problem?
A typical agreement Signatories agree to hand in red card Public display of what is being handed in (red or black) Only goes into effect if x% of people agree (eg, 60%) Participants post performance bond before each play (who keeps?)
Issues Should be self-enforcing (ie, no appeal to higher authority)--problem Penalties – how to enforce the agreement?
• Penalties for cheating (ie, not handing in red card)• Penalties for free-riding (ie, not joining but benefiting from agreement)
Must create an aggregate gain to participants Must be in best interest of individuals to join (both cooperators and
free-riders) – what if different countries start with different # red cards Must have means to distribute gain
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Back to the Real World
Card game has lessons for the real world
Goal: identify desirable characteristics of international environmental agreements
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How to think of an IEA
Global problem that affects many countries
Countries have to voluntarily agree to do something about the problem
Any penalties for cheating must be included in treaty
There can be no overarching enforcer
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Desirable Attributes of a Successful IEA
Create an aggregate net benefit to participants overall gross benefits > overall gross costs
Distribute the aggregate gain among participants For each participant, benefits > costs (individual rationality) Self-interest important in convincing country to agree
Deter non-participation Must make it undesirable to remain outside agreement Trade sanctions most frequently used Design net benefits in > net benefits out (participation constraint)
Deter cheating among participants Penalties must be credible Trade sanctions are easiest to use
Deter entry of new non-participants (avoid “leakage”) Particularly appropriate for common property problems Saving a fishery increases rents and may induce non-fishing countries to
enter
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Montreal ProtocolDesigned for CFC’s leading to Ozone Depletion
Quantitative emission limits for industrial, transition and developing countries
Industrial countries pay for added costs to developing countries
Trade sanctions for non-participants and violators
Initial protocol modest; gradually tightened over 10-year period
Ozone Levels ProjectedSource: World Met Org
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UN Framework Convention on Climate Change – Kyoto Protocol
Emerged from Rio Conference in 1992 US signed and ratified UNFCCC Modeled after Montreal Protocol Kyoto Protocol (1997) defines emission
reductions for Annex I (developed) countries Developing countries largely exempt Penalties for noncompliance missing
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Montreal vs. KyotoA partial comparison
Montreal Kyoto
Aggregate Net Benefit? YES YES??
Distribute Aggregate Gain NO NO
Deters nonparticipation? YES NO
Deters cheating? YES NO
Addresses leakage? YES NO
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Environmental regulations in the developing world
Often environment is low on policy priority list – urge to industrialize
Policy focus: employment & income Diverse instruments used, hard to
generalize. Typically market based instruments not as
widely used or effective.
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Environmental charges & funds Central & East Europe (planned
economies): high pollution last few decades
Attract limited international capital Instituted some environmental taxes
But no bite until decentralized Poland: careful CBA to attract debt-
for-nature, unusually successful
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Planned economy emissions fees
Sulfur, NOx, carbon, some particulates, lead
Transportation tolls Water extraction charges, water
pollution fines, waste management fees, fertilizer and pesticide fees
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Regulations in China
Most populous, poor ($5000 per capita GDP), one of most polluted countries
1979 law allows charging for pollution, by 1994 $2 billion collected.Fees charged when emissions above max.Fees too low to achieve standards.
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Fees in Rio Negro, Colombia
Colombian economy growing quickly Water/air pollution major problems 1993 law that environmental damages
must be taken into accountStipulates use of economic
instrumentsFees implemented: 28% decline in
pollution in first 6 months
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Voluntary emissions control in Mexico
Informal sector in Mexico: brick making Difficult to monitor, regulate (similar to
non-point source pollution) 20,000 brick kilns burn nasty stuff
Too difficult to enforce ban on dirty fuelsSubsidize propane, voluntary switchZoning for certain activitiesInvolve local grassroots
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Info & institutions: Indonesia
Rapid economic growth – drastic exploitation of resources
“Program for Pollution Control Evaluation and Rating” (PROPER) – similar to TRI Reporting, evaluating, assisting firms Grades each industry, reports in press Very successful
Other countries have adopted similar (Mexico, Philippines, Papua New Guinea)…
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Green national accounting
Measures of national income: GNP, GDPDon’t account for environmental
degradation and resource depletion Can give misleading measure of
national “well-being”, may lead to wrong policy.
Many adjustments have been proposed to “correct” standard measures.
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“Natural capital” depreciation
Natural capital: the available endowment of land and natural resources
Measure depletion of natural resources (oil, timber, minerals, soils)
Subtract from standard measures Result: many developing nations show
substantial effect
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Indonesia example: “Adjusted Net Domestic Product”
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Pollution control & cleanup
How should pollution control and cleanup costs be accounted for in developed nations?
Should cleanup expenditures contribute to GNP? Some think not.
Main issue: don’t double count. These are legitimate expenditures in order to maintain environmental values.
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How are national accounts used? Primary use: assist policy makers in
government.E.g. Gov’t expenditures on scientific
research are linked to current economic performance and climate.
United Nations has proposed a “System of Environmental and Economic Accounting”, some adjustments underway.
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Paying for public goods
Public goods will be under-provided, externalities will not be internalized in free market.
Government intervention: tax revenues can pay for cleanup, regulation, public goods provision
But many taxes “distortionary”E.g. Income tax discourages work!Costs $1.40 to raise $1 in revenue
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Double dividend
If we substitute distortionary taxes with pollution taxes, we may earn a “double dividend”Reduce pollution (and therefore
damage from pollution)Reduce distortionary taxes on labor
and thus the DWL from those taxes • This is called the “revenue recycling
effect”
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A 3rd effect of pollution taxes
“Tax interaction effect” Polluting good and leisure are substitutes
• E.g. Gasoline and Leisure Tax pollution, demand for leisure shifts out If labor is still taxed, shift introduces an additional DWL
attributed to decrease in pollution This DWL decreases social welfare. Overall size of tax interaction effect varies among
polluting industries Estimate: pollution tax should be set at 2/3 of marginal
damage. Varies considerably from industry to industry