11

Regulatory Regulatory InnovationsInnovations

What are some of the new What are some of the new and innovative ways to and innovative ways to regulate environmental regulate environmental

protection?protection?

22

MotivationMotivation

Group Project: The Clean Air Act is Group Project: The Clean Air Act is up for renewal and your group up for renewal and your group project has been tasked with coming project has been tasked with coming up with new and innovative ways of up with new and innovative ways of achieving the same objectives of the achieving the same objectives of the act but in a more flexible and less act but in a more flexible and less burdensome way.burdensome way.

33

Today’s MenuToday’s Menu Command-and-Control: Improving on itCommand-and-Control: Improving on it

– Technology standards vs. performance stdsTechnology standards vs. performance stds– Bubbles and offsetsBubbles and offsets– Technology forcingTechnology forcing

Marketable permitsMarketable permits– Auction initial issuanceAuction initial issuance– Freely distributeFreely distribute– Safety valvesSafety valves– FeebatesFeebates

Voluntary ApproachesVoluntary Approaches– Unilateral initiatives on part of firmsUnilateral initiatives on part of firms– Bilateral agreements between firms and regulatorsBilateral agreements between firms and regulators– Voluntary programs that firms may opt intoVoluntary programs that firms may opt into

Information disclosure regulationsInformation disclosure regulations Banking of creditsBanking of credits

44

Command-and-ControlCommand-and-Control

ProblemsProblems– Failure of Equimarginal PrincipleFailure of Equimarginal Principle– Reduced incentives to find better ways to control Reduced incentives to find better ways to control

problemproblem– Regulator needs private info from polluter – toughRegulator needs private info from polluter – tough

AdvantagesAdvantages– Flexibility in defining standardFlexibility in defining standard– Verification can be easy (is equipment in place?)Verification can be easy (is equipment in place?)– Greater certainty regarding extent of pollutionGreater certainty regarding extent of pollution– Intuitively attractive to engineersIntuitively attractive to engineers

55

Command-and-Control: Command-and-Control: InnovationsInnovations

Technology standards vs. Performance StandardsTechnology standards vs. Performance Standards– Most inflexible is standards specifying type of control technologyMost inflexible is standards specifying type of control technology– Somewhat more flexible are standards stipulating overall emission Somewhat more flexible are standards stipulating overall emission

levellevel BubblesBubbles

– Firm may have multiple plants, each subject to regulationFirm may have multiple plants, each subject to regulation– Bubble allows firm to put all plants under a bubble and only count Bubble allows firm to put all plants under a bubble and only count

what leaves bubblewhat leaves bubble OffsetsOffsets

– New firm wants to enter polluted urban areaNew firm wants to enter polluted urban area– Must “induce” another firm to reduce emissions, offsetting new Must “induce” another firm to reduce emissions, offsetting new

emissionsemissions– How is this similar/dissimilar to a marketable permit system?How is this similar/dissimilar to a marketable permit system?

Technology forcingTechnology forcing– Stipulate regulation that is not currently technologically feasibleStipulate regulation that is not currently technologically feasible– If credible, can reduce costs in long runIf credible, can reduce costs in long run– Subject to manipulation through the ratchet effectSubject to manipulation through the ratchet effect

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Marketable Permits--Marketable Permits--ExamplesExamples

Acid Rain Allowance System (SO2)Acid Rain Allowance System (SO2) RECLAIM in LA (NOx and SO2)RECLAIM in LA (NOx and SO2) EU Carbon Trading (CO2)EU Carbon Trading (CO2) Wetlands bankingWetlands banking Habitat PlansHabitat Plans Lead in gasoline phasedownLead in gasoline phasedown Fishing QuotasFishing Quotas

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Marketable Permits: +/-Marketable Permits: +/-

AdvantagesAdvantages– Informational requirements can be smallerInformational requirements can be smaller– Provides incentives for polluters to reduce costsProvides incentives for polluters to reduce costs– Equimarginal principle automatically satisfiedEquimarginal principle automatically satisfied

DisadvantagesDisadvantages– Can be difficult in complex world of spatial and Can be difficult in complex world of spatial and

temporal variationtemporal variation– Political problems associated with making firms Political problems associated with making firms

pay more or from setting up property rights to pay more or from setting up property rights to pollutepollute

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Marketable Permits: Marketable Permits: InnovationsInnovations

Auction or free?Auction or free?– Auction generates revenue for govAuction generates revenue for gov– Free distribution solves major political problemFree distribution solves major political problem

Safety ValveSafety Valve– Big issue for climate is cost uncertaintyBig issue for climate is cost uncertainty– Allow trading of permits but make available extra permits from Allow trading of permits but make available extra permits from

gov at price perhaps double expected market pricegov at price perhaps double expected market price For example, for greenhouse gases, expect permits to trade for For example, for greenhouse gases, expect permits to trade for

$25; make extra permits available at $50$25; make extra permits available at $50– What advantage does this have?What advantage does this have?

FeebatesFeebates– Above average performers get subsidies for good performanceAbove average performers get subsidies for good performance– Below average performers pay penalites (fees) for poor Below average performers pay penalites (fees) for poor

performanceperformance– Net payments approximately zeroNet payments approximately zero– Provides upward pressure on performance.Provides upward pressure on performance.

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Voluntary Actions: ExamplesVoluntary Actions: Examples

UnilateralismUnilateralism– BP’s program to reduce GHG emissionsBP’s program to reduce GHG emissions– ISO 14000 ISO 14000 [management plan][management plan]

Bilateral AgreementsBilateral Agreements– Project XL Project XL [allows firms to violate statutes if they can show [allows firms to violate statutes if they can show

they will achieve greater environmental performance]they will achieve greater environmental performance]

Voluntary Opt-in ProgramsVoluntary Opt-in Programs– 33/50 Program at EPA 33/50 Program at EPA [33% redux of certain toxics by 1992; [33% redux of certain toxics by 1992;

50% redux by 1995, relative to 1988; firms voluntarily opt-in and agree to make 50% redux by 1995, relative to 1988; firms voluntarily opt-in and agree to make the reductions]the reductions]

– Conservation Reserve Program Conservation Reserve Program [pay subsidies to [pay subsidies to participate]participate]

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Why do firms participate in Why do firms participate in voluntary programs?voluntary programs?

Seems like no firm would voluntarily incur Seems like no firm would voluntarily incur extra costsextra costs

Reasons for undertakingReasons for undertaking– Way of fending off non-voluntary regsWay of fending off non-voluntary regs– Way of establishing a “green” image and enhancing Way of establishing a “green” image and enhancing

product marketingproduct marketing– Reduce perceived environmental risk to investors, Reduce perceived environmental risk to investors,

thus reducing the cost of capitalthus reducing the cost of capital– Social responsibility (?)Social responsibility (?)

Bottom line:Bottom line: firms are generally assumed to still firms are generally assumed to still be acting in their own self interest, broadly be acting in their own self interest, broadly defined.defined.

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Information disclosureInformation disclosure

Toxic Release Inventory (TRI) started in Toxic Release Inventory (TRI) started in 1986 to provide public information about 1986 to provide public information about release of toxic substancesrelease of toxic substances

640 chemicals640 chemicals Also voluntary agreements (e.g. 33/50)Also voluntary agreements (e.g. 33/50) Local environmental groups use TRI to Local environmental groups use TRI to

pressure & report on industrypressure & report on industry More info yields better economic More info yields better economic

performance. Good starting point for new performance. Good starting point for new regulations.regulations.

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Incentives for innovationIncentives for innovation

PolicyPolicy Gains to innovating Gains to innovating firmfirm

Command & ControlCommand & Control nonenone

Best available Best available technologytechnology

--

Performance Performance StandardsStandards

++++

Emissions taxEmissions tax ++++++

Auctioned permitsAuctioned permits ++++++++++

Grandfathered permitsGrandfathered permits ++++

Tradable performance Tradable performance standards standards

++++

Voluntary MeasuresVoluntary Measures nonenone

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ConclusionsConclusions

Innovations in regulation is where Innovations in regulation is where the action isthe action is

Marketable permits have achieved Marketable permits have achieved great success and will probably great success and will probably continue to expandcontinue to expand

Voluntary approaches have had Voluntary approaches have had questionable success in terms of questionable success in terms of improving environmental improving environmental performance at reduced costsperformance at reduced costs