Optimal Regulation of Multiple Pollutants
The implementation of a multi-pollutant policy perspective requires a careful consideration of how integrated pollution management should occur in practice and what regulatory methods are appropriate. To make this advice practicable, one needs to have an understanding of how the choice of regulatory techniques influences environmental and social welfare outcomes and the potential co-benefit or trade-offs of combining different methods for regulating pollutants. Moreover, the multi-scalar character of environmental problems -spatially, temporally, and socio-politically - adds significant complexity to their governance since there are multiple layers of environmental governance that interact with each other, and usually these decision makers´ policy choices, targets and timings are not fully coordinated.
This project will investigate the optimal regulation of multiple pollutants. The overarching objective is (1) to identify the institutional arrangements needed for effective coordination and implementation of integrated pollution management, and (2) to evaluate the performance of different instrument combinations under multi-governance.
Optimal Regulation of Multiple Pollutants
The purpose of this project was to analyze the optimal regulation for multi-pollutants by investigating (1) the effects of the multi-governance structure of multi-pollutant regulation, (2) linkages between incentives to production and environmental policies under multi-governance.
In line with this objective, we have worked with both questions. The most important project results so far are described below
• We have analyzed empirically the effects of the interactions of the two pillars – market and environmental support – of the European Union Common Agricultural Policy on farmers’ uptake of organic farming. We have shown that there is a negative effect of market support on the uptake of organic farming. Such results have been published in American Journal of Agricultural Economics.
Jaime, M., Coria, J. and X. Liu (2016). Interactions between CAP Agricultural and Agri-Environmental Subsidies and Their Effects on the Uptake of Organic Farming. American Journal of Agricultural Economics 98(4):1114-1145.
• We have analyzed the interplay between policies aimed to control climate change and local air pollution. The two types of pollution interact in the abatement cost function of the polluting firms through economies or diseconomies of scope. They are regulated by distinct entities (global versus local regulator), potentially with different instruments that are designed according to some specific agenda.
We show that (without any international obligation for GHG emissions) it is in each country's own interest to reduce its GHG emissions when there are economies of scope in the abatement of GHG and local air pollution. It is so even if each country has a negligible impact on global GHG emissions. In contrast, when there diseconomies of scope, countries have no self-interest in reducing GHG emissions. Worse, the regulation of local air pollution might lead to higher GHG emissions.
When GHG emissions are regulated internationally through an international treaty, the choice of instrument matters. In particular, if countries anticipate that GHG emissions would be regulated in the future through cost-efficient emissions caps – somehow similar to the Kyoto protocol- they have incentive to distort the stringency of their own domestic regulation on local air pollution to obtain higher emission caps. Whether the regulation is too stringent or not enough depends on whether there are economies or diseconomies of scope in abatement efforts. In any case, even if the emissions caps are set cost-efficient ex post (once domestic regulations for local air pollution have been implemented), they are distorted: the same target on global GHG emission is achieved at a higher cost. In this case, the policy spillover effect is bad for the climate. Similar distortions on local air pollution arise with a tax on GHG emissions when each country keeps all the revenue from taxing emissions within its territory. To avoid this distortion, the revenue from taxing emissions at the world level should be assigned to a country independently of its own contribution (e.g., as a lump-sum payment). Similarly, the allocation of emission caps or allowances should not depend on abatement costs, e.g. per capita or GDP.
The paper also shows that the strategic distortion of climate policy on the stringency of local regulations is mitigated for "big" countries that have a significant impact on global GHG emissions. Big GHG emitters would partly internalize how their choice of local air pollution affects GHG emissions, which undermines this strategic effect. However, this holds for non-tradable emission caps but not for tradable emission caps: a big country might distort its local air pollution regulation to manipulate the price of permits. How it departs from the first best depends on the dominant country's abatement cost spillover (i.e., economies or diseconomies of scope) and whether the country is a net buyer or a net seller in the market for permits. For instance, we find that a dominant country that is a net buyer of permits will over-abate (under-abate) local pollution when there are economies (diseconomies) of scope in order to reduce the price of emission permits. In contrast, the incentives are reversed when the dominant country is a net seller of permits.
From our analysis, we can conclude that policy spillovers is good news for the climate in the absence of any international obligation on GHG emissions when there are economies of scope (or ancillary benefits) in abatement costs. Furthermore, the cost interaction between abatement of local and global pollution matters for the choice of regulation instruments for GHG emissions for the reasons explained above.
Such results have been published in Journal of Environmental Economics and Management.
Ambec, S. and J. Coria (2018). Policy Spillovers in the regulation of multiple pollutants. Journal of Environmental Economics and Management 87: 114-134.
The project above also generated new research questions regarding the informational value of environmental taxes. An expanding economics literature argues for the general superiority of market-based policy instruments over command-and-control regulation, primarily because of the relative cost savings expected with market-based approaches. These cost savings arise principally because the latter approaches economize on scarce information about control costs and capitalize on differences in costs among regulates, give regulates the incentive to minimize costs of current technology, and provide a basis for environmentally sound and cost-effective technological innovation. In practice, the laws pertaining to many major environmental problems - as for instance, clean air, clean water and management of hazardous waste - are typically enacted and managed at all levels of government, implying that many regulations covering the same emission sources overlap and override each other. This is for instance, the case of climate policy, where all countries and regions having implemented climate policies seem to rely on several policy instruments (covering the same emission sources) rather than a single.
The multiplicity of policy instruments to address a single pollution problem has been justified on several grounds. For instance, some (additional) market failures, regulatory failures or behavioral failures may reduce the economic efficiency of market-based instruments and justify additional policy instruments. The aim of this paper is not to discuss these justifications, but to introduce and discuss another rationale: the informational value of the policy overlap. In particular, we highlight the informational value of a pollution tax on the design of other environmental regulations when the firm's costs of abating pollution are unknown by the regulatory authorities. We investigate whether and how a tax set exogenously can help regulators to set a standard (a cap) on pollutant emissions. Our idea is that the tax rate reveals information of the marginal cost of compliance that can be used to better target the standard on the firm's true cost. Thus, the paper deals with the design of environmental policy with multiple instruments (emission tax and non-tradable caps).
Stefan Ambec and Jessica Coria. (2018). The informational value of environmental taxes. Expected to be published as working paper at the end of the year 2018 after presentation in several conferences during the year.
This project was carried out as joint work between researchers at the University of Gothenburg and Toulouse School of Economics. To enhance and facilitate collaboration Jessica Coria (Stefan Ambec) has visited Toulouse School of Economics (the University of Gothenburg) twice per year. Such an exchange has broadened both researchers’ networks as well as increased the interaction between researchers at Gothenburg and Toulouse (e.g., other researchers at Toulouse have been hosted by University of Gothenburg and vice-versa).
The results of the projects listed above were also presented in the following seminar series/conferences:
Jessica Coria presented as a seminar series speaker at the International Institute for Applied Systems Analysis (IIASA), Austria (19th of February 2015)
Jessica Coria presented at the 21st Annual Conference of the European Association of Environmental and Resource Economists (24th to 27th of June 2015)
Jessica Coria presented at Umeå University (October 2016) in Sweden, Stirling University in United Kingdom (March 2018) and at Luleå University in Sweden (March 2018).