Search

We present a formal model that analyzes the trade-offs between environmental policy and economic growth in a developing economy. The adoption of restrictive environmental policies limits the use of abundant fossil energy resources, which may slow down economic development and thus violate the Right-to-Development. If faster economic growth allows a country to grow out of pollution sooner, less stringent policies are good for growth and even for the environment, having adopted a long-term horizon. Accounting for a ceiling on cumulative emissions can reinforce the argument by providing an additional rationale to phase out pollution. One assumption is crucial for the argument to hold: polluting fossil energy is an essential input over the early phase of economic development, but not in the later phases. Such a discontinuity could result from structural change. We provide empirical evidence for the plausibility of a discontinuity in the elasticity of carbon dioxide emissions with respect to aggregate output, using cross country data, even if it does not appear to be as strong as assumed in the model economy. [ABSTRACT FROM AUTHOR]

The ongoing debate concerning the ranking of taxes versus cap and trade for climate policy begins with Weitzman's (1974) seminal slope-based criterion and concludes that taxes likely dominate quotas. We challenge this conclusion and the intuition behind it. Because technology shocks and pollution stocks are both persistent, a technology shock alters the intercepts of both the marginal damage and abatement cost curves. The ratio of these two intercept shifts is as important as the ratio of slopes in ranking policies. Technology innovations diffuse gradually, strengthening the importance of the ratio of intercept shifts. For plausible parameter combinations, quotas can dominate taxes. [ABSTRACT FROM AUTHOR]

In decentralized environmental governance, local governments are likely to adopt the "beggar-thy-neighbor" strategy to relax regulations at boundaries. This study investigates the impact of China's Joint Atmospheric Prevention and Control Policy (JAPCP) in "2 + 26" cities enforced by the central government on pollution at provincial boundaries. The theoretical model suggests that dual incentives for environmental protection and economic growth may prompt local governments to reduce boundary pollution within the JAPCP-covered area while relocating pollution to uncovered boundaries. Based on Shandong Province data using the difference-in-differences approach, our analysis reveals a 9.6% decline in the air quality at JAPCP-covered boundaries compared to non-boundary areas and a 5.3% increase at JAPCP-uncovered boundaries, which is associated with migration of key regulated industries. Through examining annual work reports, we provide evidence that local governments modify regulatory intensity at various boundaries. These findings indicate that, while regional environmental policies are intended to promote inter-jurisdictional cooperation, the local government responses lead to unintended costs. [ABSTRACT FROM AUTHOR]

The paper develops a general framework for the analysis of environmental shocks in growing economies. Endogenous capital investments allow identifying the dual role of capital as a buffer against shocks and a source of pollution. We study the effects of recurring natural disasters on optimal growth and efficient environmental policies. Emissions may cause continuous fluctuations, entail discrete and recurring jumps, or trigger so-called "tipping points" with large costs to the economy. Closed-form solutions are provided for all the model variants. We discuss possible applications in environmental economics and identify current research gaps. [ABSTRACT FROM AUTHOR]

Abstract In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition. [ABSTRACT FROM AUTHOR]

Abstract We assess how regional rail service affects air pollution in Germany, where rail service is procured in auctions or negotiations. We argue that the procurement mode is plausibly exogenous, and show that auctions deliver stronger rail service growth than negotiations. Instrumenting rail service growth with procurement mode, we find that increasing rail service by 10% reduces carbon monoxide and nitrogen oxide pollution by around 1% and 2%, respectively. Sulfur dioxide and ozone, pollutants with no clear link to rail, are not affected. Expanding rail service reduces car and motorcycle use, especially on leisure and shopping trips. The effects of railway services on car and motorcycle use and on air pollution build up over time. Lives saved by reducing pollution via rail service growth are worth substantially more than the required subsidies. [ABSTRACT FROM AUTHOR]

We develop a two-good general equilibrium model of a small open economy to decompose the effect of a country's unilateral strengthening of environmental policy on pollution emissions in the rest of the world, known as emissions leakage. We show analytically and numerically that the level of emissions leakage depends on the level of trade friction in the service sector. In the model, production in the manufacturing sector is associated with pollution emissions, and production in the service sector is clean. In a special case with free trade in manufacturing and no trade in services, no leakage occurs. Allowing for trade in services, we solve for the relationship between trade frictions in the service sector and leakage. At lower levels of service sector's trade friction, leakage from a small strengthening of environmental regulation decreases (increases) if services are imported (exported). Finally, we simulate the model, calibrating the to the Canadian economy to compare these effects’ relative sizes over a range of plausible parameter values. Leakage is about 18% lower when using trade friction levels estimated from the literature rather than assuming no trade friction in services. [ABSTRACT FROM AUTHOR]

This paper examines the effect of removing pollutants, mainly polychlorinated biphenyls (PCBs), on home prices in Great Lakes Areas of Concern (AOCs). AOCs are heavily polluted locations identified as priorities for restoration under the Great Lakes Water Quality Agreement (GLWQA) between the United States and Canada. Since the signing of the GLWQA, AOCs have undergone cleanup actions that could encourage local redevelopment and raise nearby property values. This paper focuses on the Milwaukee Estuary AOC and estimates property owner willingness to pay as well as potential differences in willingness to pay for sediment remediation using a sorting model and home sales data before and after cleanup. Results indicate that home prices near the water increased significantly and that remediation did not change pre-existing inequalities generally favoring higher-income, predominantly white households through a process of demographic re-sorting. [ABSTRACT FROM AUTHOR]

This paper shows how policies aimed at insuring health risks and those intended to improve the environment are (and should be) deeply intertwined. In the model economy inspired by recent Chinese experience, pollution raises the likelihood of future, poor health prompting households to save more so as to self-insure against anticipated medical expenses. Increased household saving generates more capital while capital use by firms generates more pollution. Along the transition, such a “pollution-growth nexus” may be attractive from a capital-accumulation perspective; however, rising pollution, via the health channel, hurts welfare. Both insurance and environmental policies affect capital accumulation and can have additional dynamic benefits. The availability of private health insurance to top up pay-as-you-go coverage of medical bills along with a Pigouvian tax on emissions and a profit tax can replicate the first best. [ABSTRACT FROM AUTHOR]

Abstract: We examine the choice of policy instruments (price, quantity or a mix of the two) when two pollutants are regulated and firms' abatement costs are private information. Whether abatement efforts are complements or substitutes is key determining the choice of policies. When pollutants are complements, a mixed policy instrument with a tax on one pollutant and a quota on another is sometimes preferable even if the pollutants are identical in terms of benefits and costs of abatement. Yet, if they are substitutes, the mixed policy is dominated by taxes or quotas. [Copyright &y& Elsevier]

Abstract: We develop a theoretical model identifying channels through which trade impacts the environment. First, trade decouples some of regulation's costs from its benefits, prompting demand for stringent environmental regulations. Second, trade provides consumers with access to new varieties of goods; the associated income (substitution) effect raises (lowers) demand for strict regulation. The model predicts (1) international trade to be more environmentally beneficial than intranational trade due to a stronger decoupling effect, and (2) both intra and international trade to be pro-environment unless substitution effects are sufficiently strong. Using data on intra and international trade for the US and Canada, along with several environmental outcomes, we find robust evidence that international trade has a statistically and economically beneficial causal effect on environmental quality, while intranational trade has a harmful impact. This pattern is consistent with a moderate-sized substitution effect along with a stronger decoupling effect of international trade. [Copyright &y& Elsevier]

Abstract: Many important environmental policies involve some combination of emission controls and ambient environmental quality standards, for instance SO2 emissions are capped under Title IV of the U.S. Clean Air Act Amendments while ambient SO2 concentrations are limited under National Ambient Air Quality Standards (NAAQS). This paper examines the relative performance of emissions standards and ambient standards when the natural environment provides stochastic environmental services for assimilating pollution. For receiving media characterized by greater dispersion in the distribution of environmental services, the optimal emissions policy becomes more stringent, whereas the optimal ambient policy generally becomes more lax. In terms of economic performance, emissions policies are superior to ambient policies for relatively non-toxic pollutants, whereas ambient standards welfare dominate emissions standards for sufficiently toxic pollutants. In the case of combined policies that jointly implement emissions standards and ambient standards, we show that the optimal level of each standard relaxes relative to its counterpart in a unilateral policy, allowing for greater emissions levels and higher pollution concentrations in the environmental medium. [Copyright &y& Elsevier]

Abstract: Because conventional command-and-control environmental regulation often performs poorly in developing countries, policymakers are increasingly experimenting with alternatives, including voluntary regulatory programs. Research in industrialized countries suggests that such programs are sometimes ineffective, because they mainly attract relatively clean participants free-riding on unrelated pollution control investments. We use plant-level data on more than 100,000 facilities to analyze the Clean Industry Program, Mexico’s flagship voluntary regulatory initiative. We seek to identify the drivers of participation and to determine whether the program improves participants’ environmental performance. Using data from the program’s first decade, we find that plants recently fined by environmental regulators were more likely to participate, but that after graduating from the program, participants were not fined at a substantially lower rate than nonparticipants. These results suggest that although the Clean Industry Program attracted dirty plants under pressure from regulators, it did not have a large, lasting impact on their environmental performance. [ABSTRACT FROM AUTHOR]

We present a model of consumer behaviour when consumers value conformity and examine the implications for environmental policy. The model shares a feature set out in Dasgupta et al. (2016) of having a structure of preferences for conformity which induces a mass of consumers to adhere exactly to a norm level of consumption (clumping). However we extend our previous analysis by analysing the conditions for the existence and potential uniqueness of consumption norms. In doing so we introduce threshold effects whereby individuals adhere to a norm only if sufficiently many others do so. Taken together these have striking implications for environmental policy in the case where the norm good generates pollution emissions. Clumping means many individuals will not change behaviour unless the norm changes while threshold effects plus clumping means that it may be hard to change a norm. We show that the use of Pigovian taxes to control behaviour may be either ineffective or welfare reducing, and that the optimal Pigovian tax will work only if it is above some threshold level. There are parameter values for which quantity-based injunctive policies raise welfare relative to no intervention while optimal Pigovian taxes would lower welfare. [ABSTRACT FROM AUTHOR]

Abstract: Recent studies consider public R&D spending that affects abatement knowledge and endogenous growth, distortionary taxes that affect capital formation, pollution taxes that affect environmental degradation, and regeneration that restores natural capital. Our model combines all those elements. The combination affects prior results, focusing on two parameters: the need for distorting taxes, and productivity of abatement knowledge relative to pollution. First, these two extensions can reverse prior findings that pollution tax revenue is always enough to pay for public R&D. Second, tax distortions and externalities alter prior findings that the ratio of public to private capital depends only on output elasticities. Third, dynamics affect prior static findings about other public spending “crowding out” environmental public goods. Fourth, a greater need for public spending can lead to greater increases in distorting taxes or pollution taxes. Fifth, greater environmental regulation can mean growth is higher or lower, even if welfare is higher. [Copyright &y& Elsevier]

Abstract: In this article we extend the recent literature on overlapping generations and pollution by allowing generations to perceive the level of pollution differently than the actual level of pollution. We call this pollution perception. Pollution perception can visualize itself as either a concern for the flow of pollution only, or for the stock, or a combination of both. We derive this extension based on empirical evidence from recent advances in behavioural economics. Pollution perception has not only significant consequences for the steady state levels of pollution and capital, but we also find a qualitative change in the dynamics from similar models without pollution perception [A. John, R. Pecchenino, An overlapping generations model of growth and the environment, Econ. J. 104 (1994) 1393–1410]. Specifically, we derive optimal non-linear dynamics through complex eigenvalues and Hopf or Flip bifurcations for a large set of parameters. This leads to violations of two standard criteria of sustainability, suggesting that pollution perception can be another source of intergenerational inequity. [Copyright &y& Elsevier]

Abstract: In the environmental economics literature the standard approach of modeling non-linear production and abatement processes is to treat waste emissions “simply as another factor of production” [Cropper and Oates, J. Econ. Lit. 30 (1992) 675–740]. That approach does not map the materials flow involved completely and hides, moreover, the exact links between production, residuals generation and abatement. This paper shows that production functions with emissions treated as inputs can be reconstructed as a subsystem of a comprehensive production-cum-abatement technology that is in line with the materials-balance principle. In a simple economy with full regard of the materials flow it also explores the consequences for allocative efficiency and efficiency-restoring taxation of multiple and interdependent residuals generated in the transformation processes of production, abatement and consumption. Finally, the paper demonstrates that efficiency may require setting the emissions tax rate above or below conventionally defined marginal abatement cost if the residual subject to abatement is not the only residual causing pollution. [Copyright &y& Elsevier]

In this paper the effect of environmental policy on the composition of capital is investigated. By allowing for nonlinearities it generalizes Xepapadeas and De Zeeuw (J. Environ. Econ. Manage. 37 (1999) 165) and determines scenarios in which their results do not carry over. In particular, we show that the way acquisition cost of investment decreases with the age of the capital stock is of crucial importance. We also focus more explicitly on learning and technological progress. Among others we obtain that in the presence of learning, implementing a stricter environmental policy with the aim to reach a certain target of emissions reduction has a stronger negative effect on industry profits, which implies quite the opposite as to what is described by the Porter hypothesis. [ABSTRACT FROM AUTHOR]

We show that harmonizing emissions policy may be bad for the environment and/or global welfare, even when pollution is transboundary and countries are identical in every way. Harmonization effectively internalizes the transboundary aspects of pollution. But it also changes the politics surrounding tailpipe regulation. With harmonization, producers can no longer avoid strict local regulation by simply exporting their products to overseas markets with weak standards for consumer goods. As a result, harmonization may raise political opposition to regulation. To examine these competing effects we develop a generic treatment of the politics of environmental regulation, a treatment we show to be isomorphic to three popular models of political economy: majority rules, a political elite and a political contributions approach. We find that harmonization both weakens environmental regulation and reduces global welfare when the level of political capture by dirty industry is high relative to the rate of pollution transmission across borders. [ABSTRACT FROM AUTHOR]

This paper examines and quantifies the complex linkages between industrial activity, environmental regulations and air pollution. Couched in terms of the demand for, and the supply of, environmental services we utilize a new dataset of UK industry specific emissions for a variety of pollutants between 1990 and 1998. Our analysis allows us to investigate the role played by different determinants of emissions intensity. We find pollution intensity to be a positive function of energy use and physical and human capital intensity. Conversely, we find pollution intensity to be a negative function of the size of the average firm in an industry, the productivity of an industry and the industry's expenditure on capital and research and development. Our results also indicate that regulations, both formal and informal, have been successful in reducing pollution intensity. [ABSTRACT FROM AUTHOR]

We devise a system of coupled incentives that stimulate economic agents to coordinate their actions. The agents are price takers and their actions would be independent of one another ("uncoupled") if incentives were not implemented. The action coordination is expected to help a technology transition from the current one to a modern one. The latter is assumed more environmentally friendly than the former. With the incentives in place, the problem becomes one of a principal-(multi)agent game. In the game, the principal chooses instruments sufficient to generate an environmentally friendly agent reaction. We define a specific coupled incentive scheme (CIS), in which individual agents are rewarded for their joint actions' effect, rather than for their own actions' accomplishments. We show that a technology switch can be realised through CIS for a budget, for which no technology change would be achieved if only individual agent actions were compensated. We show under which conditions the agents' game has a unique solution and what the principal's choices are for the solution's implementation. [ABSTRACT FROM AUTHOR]

Many notable pollution problems occur in industries where production is carried out under vertical contractual arrangements that are characterized by conditions of double moral hazard. In this paper we derive optimum pollution taxes under such conditions. In contrast to situations characterized by full information, we show that imposing a Pigouvian tax equal to the marginal cost of pollution on either the upstream or the downstream agent or the industry as a whole does not lead to the first best level of pollution. On the contrary, the industry should pay for less than the full cost of environmental damage. In addition, we find that under conditions of double moral hazard both agents should be taxed. This is because imposition of a tax in this setting affects equilibrium contract terms and the incentives that each agent faces at the margin. Thus imposing the tax on one agent alone cannot replicate the optimum. [ABSTRACT FROM AUTHOR]

We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance efficiency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market. [Copyright &y& Elsevier]

Few issues are more contentious for local communities than industrial pollution. When local industries pollute, lawmakers and regulators must balance two primary concerns: economic prosperity and the environment. The role of political pressure is well documented in environmental policy. What is less clear is the role jurisdictional or boundary considerations play in determining the implementation of environmental laws. Anecdotal evidence suggests that local regulators are more lenient in their treatment of polluters when the incidence of pollution falls partially on those outside the state. One explanation for such behavior is that regulators take actions to maximize political support. This paper tests this jurisdictional model using toxics release inventory (TRI) data from 1987 to 1996. We find that facilities’ emissions into the air and water are systematically higher in counties that border other states. These results are consistent with the hypothesis that jurisdictional considerations are an important determinant of pollution incidence. [Copyright &y& Elsevier]

We compare noncooperative regional environmental policy to cooperative national policy for direct regulation of a mobile firm. The national government can always reach its first best with commitment, but not with time-consistent policy. With commitment, regional policy results in a game of chicken with too little output or in “not in my backyard”. Without commitment, regional policy may improve upon national policy. This happens when regional policy discourages the investment, whereas the welfare-reducing investment does take place with national policy. [Copyright &y& Elsevier]

Climate change policies create intergenerational winners and losers because the costs come first and the benefits later. In such cases, Kaldor-Hicks cost-benefit analysis seeks potential Pareto-improvements by showing the hypothetical potential for the winners to compensate the losers via lump-sum transfers. In their absence, once a costly climate policy is actually implemented, it unleashes distortions and general-equilibrium effects rendering unclear whether Kaldor-Hicks potential improvements lead to actual improvements. We study policies which, once implemented, would pass the Pareto test that no generation subsequent to policy action be made worse off than before. We develop a stylized climate-economy model in which production by the current generation generates pollution which "damages" production for future generations. Over time, the business-as-usual (BAU) economy gets increasingly polluted, consumption falls, and generational welfare levels decline. A government introduces costly pollution abatement and finances it via distorting taxes and the sale of debt ("green bonds"). Pollution levels start to decline, generating downstream welfare gains which may be taxed – without hurting anyone, in a Pareto sense – to help finance the policy and pay off the debt. Along the transition, every generation faces less pollution, consumes more and is happier than if life had continued in the BAU world. [ABSTRACT FROM AUTHOR]