Environmental Economics, Part 3
In 2002, the Irish government introduced a 15 cent tax on plastic shopping bags. Previously supermarkets provided these bags free to customers. The goal of the tax was to reduce the eyesore of bags littering the countryside, and the wasted resources. The tax was massively successful, cutting the number of plastic bags used by 90% almost immediately. Here in Germany where I live shoppers similiarly carry their own bags to the market.
Taxes are an example of incentive-based policies called "market mechanisms". Another market mechanism is environmental taxes, which charge firms by unit of pollution or polluting product. Throughout the world there are environmental taxes on fuels, batteries, garbage, carbon dioxide, and other products.
There are many potential problems to any of these schemes which the book covers. One particularly interesting one is in the case of nitrogen oxides emissions in Sweden. Bigger industrial power plants might have overwhelming taxes to pay compared to smaller plants. To equalize the market and to encourage plants to become more efficient, the government returns the environmental taxes to the plants in proportion to the energy they produce. What governments do with the money they raise with environmental taxes is a key feature of these policies.
Another market mechanism is emissions trading. In this scheme, the government creates a market with a set number of emissions credits, each credit having a price. Companies and utilities can choose to abate emissions or purchase these credits. If the price is set right (see MAC vs MED in the previous newsletter), it is cheaper to abate the pollution than purchase the credits.
Market mechanisms sometimes feature "safety valves". If an Irish shopping forgets to bring reusable bags to the market, they can buy bags. If a company faces unusually expensive pollution abatement, they can purchase emissions permits. This may also create an incentive for firms to create innovative ways to avoid creating pollution or for abating pollution. When firms have more flexibility in their options and can achieve the outcome with a lower cost, economists call this "static efficiency".
Emissions trading schemes have been in use for over 40 years, and have been effective in reducing acid rain, river pollution, and lead emissions from refineries.
Contrast market mechanisms with "command and control" regulation, which uses law and policy to require changes in polluter's behavior. For example:
* Requiring firms to use particular pollution-abatement technology.
* Limiting the amount of emissions.
We can see the latter in effect now in California, which is requiring gasoline producers to decrease the carbon intensity of fuels. This will directly result in air quality benefits. It may also raise the price of already expensive gasoline so that customers buy less of it, or switch to electric vehicles.
Next time we'll look at how economists place a value on the environment when making cost-benefit calculations.