1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 17 Regional and Global Air Pollutants: Acid Rain and Atmospheric Modification

2. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-2 Introduction This chapter extends the analysis of air pollution to pollution that crosses jurisdictional boundaries. The chapter is divided into two main sections. The first covers regional pollutants causing acid rain. The second section covers global pollutants and global problems such as ozone depletion and global warming.

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-3 Objectives Introduce the general differences and overlap between regional and global pollutants. Discuss the management issues associated with transboundary pollutants. Explain the conceptual issues associated with externalities in both space and time. Outline policy options for the control of regional pollutants. Illustrate the level of economic efficiency of each option. Present global pollution problems and management options.

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-4 Regional Pollutants Acid Rain Acid rain is the most common damaging effect. The rain can take the form of either wet or dry deposition. In 1980 the U.S. Congress funded the National Acid Rain Precipitation Assessment Program to determine the causes and effects of acid rain. The findings were related to fish species tolerance of acidity, effects on visability, acidification of lakes, effects on forests, etc. Studies suggest that damages are much higher in Europe.

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-5 The Transboundary Problem Prior policy in the United States (and other countries with federal governments) focused on local pollutants or treating pollutants like local pollutants and giving local jurisdictions responsibility for meeting air quality standards. By focusing on local standards, the Clean Air Act made regional pollution worse.

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-6 Crafting a Policy Regional pollutants require policies made at a regional level; interstate or international. Regional solutions can be politically difficult. The Congressional Budget Office used a simulation to determine the economic and political consequences of various policies. The general insights are as follows:  The marginal cost of additional control would rise rapidly.  Emissions charges would be more cost effective than the comparable CAC strategy.  Emissions charges are more cost effective, but are not the most popular.

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-7 TABLE 17.1 Costs Associated with Basic Strategies to Reduce Sulfur Emissions

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-8 The Sulfur Allowance Program The sulfur allowance program is a cap-and-trade program. An aggregate limit was established on emissions. Allowances are then allocated to the emitters covered by the cap with total allowances not exceeding the cap. New emitters can be accommodated without total emissions rising since the new emitters can purchase allowances from current emitters.

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-9 Results of the Program Emissions-allowance trading programs generate flexibility since they allow some utilities to voluntarily accept greater control if installing scrubbers is the cheapest alternative. Those purchasing the allowances would, in effect, be subsidizing the installation of a scrubber at another location. Overall emissions would fall. A large number of firms with differing marginal abatement cost schedules is necessary for this program to work well.

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-10 Global Pollutants Ozone Depletion The use of cholorofluorocarbons (CFCs) for aeorsol propellants, packing materials and refrigeration has been a large factor in the depletion of the stratospheric ozone shield. Because the pollution accumulates, the permits would need to be for a one-time release and the price would be expected to rise over time.

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-11 TABLE 17.2 Comparisons of Alternative Policies Having Similar Cumulative Emissions Reductions

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-12 In 1988, the Montreal Protocol required 24 signatory nations to restrict the production and consumption of the chief responsible gases to 50 percent of their 1986 levels by 1998. 96 chemicals are currently controlled by agreements. In 1990, the parties agreed to establish a Multilateral Fund to facilitate the phase-out of chemicals. Industrialized countries contribute to the fund to cover the costs of developing countries in eliminating the production of ozone-depleting chemicals.

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-13 Climate Change Carbon dioxide, methane, nitrous oxide, tropospheric ozone and CFCs make up a class of pollutants called greenhouse gases. The Intergovernmental Panel on Climate Change found that most of the warming observed in the last 50 years is anthropogenic in nature. Natural systems are vulnerable to climate change. Human systems are also sensitive to climate change. Four strategies to deal with global warming have been considered: (a) Climate engineering, (b) Adaptation, (c) Mitigation, (d) Prevention.

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-14 Negotiations Over Climate-Change Policy Options The United States, in particular, was reluctant to agree to emission charges. Leakage can occur if taxes on producers are passed on to the consumers. Emphasis has shifted toward emission trading.

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-15 International Agreements on Climate Change The Kyoto Protocol became effective in February 2005. The Kyoto Protocol allows for implementation mechanisms that involve tradable permits.  (a) Emissions Trading allows trading of the national quotas among countries listed in Annex B.  (b) Joint Implementation allows Annex B countries to receive emission reduction credits when they help finance projects in another Annex B country.  (c) The Clean Development Mechanism allows Annex B parties to finance emission reduction projects in non-Annex B countries (e.g. developing countries) and receive certified emission reductions for doing so.

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-16 Complementary Strategies The Prototype Carbon Fund (PCF) was established by the World Bank. The PCF acts as a “greenhouse gas mutual fund.” Investors receive a pro rata share of the emission reductions. The Global Environmental Facility (GEF) funds projects designed to reduce the impacts of climate change through loans or grants. The GEF uses a marginal-external- cost rule when evaluating a project.

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-17 The Case for Emissions Trading Studies suggest that the effect of controlling climate change would be to slow growth, but not stop growth. Economic incentives such as emission trading provide nations with incentives to develop innovative approaches. Emission trading also facilitates transboundary cost sharing. Debate 17.2 presents some of the controversies surrounding emission trading.

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-18 Debate 17.1

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-19 The Timing of Policy There are enormous uncertainties associated with climate changes. Benefits from control are received in the distant future, while costs occur now. Uncertainties about the costs and benefits are also problematic. Governments must make decisions without complete information.

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 17-20 Creating Incentives for Participation in Climate Change Agreements Game theory has been used to study participation in agreements with public good problems. Policies can make participation more likely by increasing the net benefits from participation. “Issue linkage” is a strategy where countries simultaneously negotiate a climate change agreement and another economic agreement on a linked issue, e.g. trade for example. A final strategy involves transfers from gainers to losers or a redistribution of net benefits.