Economic Incentive

----- Versus-----
Command and Control:
Whats the Best Approach for Solving
Environmental Problems

By Winton Harrington & Richard D. Morgenstern

Fall/Winter 2004, Resources, pp. 13-17.
http://www.rff.org/RFF/Documents/RFF_Resources_152_ecoincentives.pdf
 No Single Solution
Economic Incentives (EI)
Some sort of monetary fee/fine per unit of
pollution emitted
Command and Control (CAC)
Direct regulation
Study looked at six environmental policies
in the United States and European Union.
 Six Policies
SO2 emissions from utility boilers
Permit Market (US)
Sulfur Emissions Standards (Germany)
NOX emissions from utility boiler s
Emission Taxes (Sweden and France)
New Source Performance Standards (U.S.)
Industrial Water Pollution
Effluent fees (Netherlands)
Effluent Guidelines and National Pollutant Discharge Eliminations System Permits (U.S.)
Leaded Gasoline
Marketable Permits for leaded fuel production (U.S.)
Mandatory Lead phase out differential taxes to prevent misfueling (most of Europe)
Chlorofluorocarbons (CFCs)
Permit Market (U.S.)
Mandatory Phase Out (Other Industrial Countries)
Chlorinated Solvents
Source Regulation (U.S.)
Three Distinct Policies (Germany, Sweden, Norway)
 Evolution of the Policy
In the 1970s, CAC approach was predominant.
Policymakers switched over to a more EI policy
sometime between the 1970s &1990s.
Could be because they were more aware
Also, it could be because tradable emissions permits
in the 70s came into existence
Could just be disappointment in CAC regulations
 The Two Sides of the Pond:
Comparisons
The United States is a single federal body
whereas the European Union is multiple
countries.
Differences in pre-regulatory studies
undertaken.
U.S. EPA is required to conduct a Regulatory Impact Study
before taking action. So, it is easier to determine the possible
benefits.
Environmental Taxes are virtually nonexistent in
the U.S.
Europe uses regulatory taxes more often.
 Testing the Hypothesis
Whats the Best Approach?
The authors compiled 12 most commonly
used hypotheses.
Then they focused on the five that they felt
were the most important.
 1) EI More Efficient than CAC
There is a perceived efficiency of EI over
CAC. Not Air Tight case though.
EI is more cost effective at given emissions
reduction.
However, efficiency requires a system of perfect
competition and emissions are not location specific.
In the US for instance:
EI achieved substantial cost savings in elimination of
CFCs, and lead in gasoline
lowered SO2 emissions & realized costs are 1/2 of
expectations in 1990 and a 1/4 of expected CAC cost.
However where EI are too strict, EI do not achieve cost
savings over CAC
2) EI Gives Continual Incentive
for New Technology
EI is sometimes favored because it seems
not to hamper technology in the same way
as CAC.
E.g. in Sweden, the NOx tax caused
experimentation in boilers
U.S. research shows that CAC only
encourages cost-reducing innovation,
while EI causes cost-reducing and
emission reducing innovation.
 3) CAC policy achieves objectives
quicker & w/ more certainty
In the 1970s, CAC was effective in causing quick compliance in
some cases.
Solvent Trichloroethylene (TCE) phase out resulted in little participation
w/ EI aspects in the U.S.
Europe needed to use CAC in addition to Tax Differentials to achieve
any progress by:
Mandating Catalytic Converters
Maximum Lead Content
On the other hand EI was effective:
In Holland, the influence of effluent fees (a EI) on organic waste load
reductions was prompt and large.
The problem is that both policies can have undesirable long term
effects.
Regulated new coal power plants just extend the life of older non-regulated ones.
In Sweden, TCE users gained multiple waivers.
4) Regulated Industry prefers CAC
EI has lower social costs, but has higher costs to
the firms
In many industries, the firm pays the cost of
abatement plus a fee for the remaining pollution
it discharges.
In reality, nearly all governments eliminate the
burden of the EI instruments by returning fees to
the firm
France subsidized the firms abatement investments on NOx
discharge fees.
Sweden fees were returned on the basis of the energy they
produced.
In the U.S., tradable permits have always been given away
rather than auctioned off.
 5) CAC have higher
Administration Cost
EI fees for increased emissions tend to
rise gradually, whereas in CAC a line
separates compliance from violation.
No clear pattern.
Both CAC Effluent Guidelines and EI lead
phase down program put higher costs on
EPA.
US EI SO2 program had low admin. costs.
Germany CAC SO2 program had roughly
same costs as EI
 Conclusions
EI appears to produce costs savings in
pollution abatement as well as innovation.
Firms prefer CAC regulation because of a
perceived lower cost to them.
Today, most policy is a blend of both, and
they have been successful.
Emissions fell by 2/3 compared to base line
results.