Common access resources

What are they?  Common access resources are resources that are not owned by anyone, do not have a price and are available for anyone to use without payment.  Other names: common-pool resources, common-property resources  Natural resources: forests, fishing grounds, pastures. But also human-made, such as irrigation systems.

What is the problem?  They are non-excludable: it is very difficult or expensive to exclude people from using them (for example, fisheries), so…  This may encourage overuse or over-consumption and lead to the depletion of the resource.  A market failure will take place because of the overconsumption.

Sustainability  When the consumption needs of the present generation are met without reducing the ability to meet the needs of future generations.

Threats to sustainability Pollution of affluence. It arises from industrial production and high-income consumption patterns that involve the heavy use of fossil fuels, using up open access resources and leading to climate change. Pollution of poverty. It arises from production and consumption activities that are due to poverty. Due to economic activities by very poor people in an effort to survive.

Pollution of poverty  The use of wood for cooking by low income people in rural areas of developing countries leads to deforestation.  The use of common access land not suited for growing food by households relying on subsistence agriculture will eventually lead to the exhaustion of the land, soil erosion and desertification.

A different perspective: A company that owns the forested land in a LDC and whose goal will be to maximize profits from the wood it produces. The company will only take its private costs into consideration. The loss of the forest to present and future generations (including loss of bio-diversity, flooding, soil erosion) are external costs that the company will not pay. There will be over-production and under-pricing of wood products. MSC S=MPC D=MPB=MSB External cost Q P QoptQm Popt Pm

The use of fossil fuels  It can be illustrated using the previous diagram.  MPC: private costs of a cement factory. External costs can be interpreted as the social cost of overuse of clean water, sea life and ozone layer or as the cost to society of causing global warming.  Burning of fossil fuels causes overuse of common access resources, an external cost.

Government responses to threats to sustainability 1.Cap and trade schemes  Governments set national targets for emission reductions and encourage firms to meet the targets.  International coordination is necessary.  Kyoto protocol (Kyoto, 1997) has the objective to cut global emissions of six major greenhouse gases.  Ratified by 187 countries.

2.Clean technologies are renewable energy sources including solar power, wind power, hydropower and biofuels but also energy-efficient cars, homes, buildings,…  Governments can assist by subsidizing their development or by giving tax credits to firms that invest in these technologies.  Carbon taxes. They aim at taxing the use of fossil fuels in accordance with the amount of carbon each ones emit. Hence, users face the incentive to switch to fuels that emit less (or no) carbon. Denmark, Finland, France, Ireland, NL, Poland, Sweden, some states in Canada and the US.

4.Legislation. A few examples:  restrictions on emissions from cars  restrictions on emissions from factories  requirements to install devices that reduce air pollution  issuing licences or permits for fishing and hunting  restrictions in the form of quotas for fishing  establishment of protected areas for the protection of biodiversity and endangered ecosystems

Advantages:  Simplicity  In most cases, they can be very effective.  In the case of emissions industrial production, they avoid the technical difficulties of market-based solutions. Limitations:  In the case of pollution, they do not offer incentives to reduce emissions.  Cannot distinguish between high and low cost polluters.  Costs of monitoring to detect violations.

C. BORDOY UWC MAASTRICHT Evaluating carbon taxes and cap and trade schemes Carbon taxes fix the price of the pollutant in the form of a tax, and allow the quantity to vary. Cap and trade schemes fix the quantity of the permissible pollutant and allow its price to vary according to supply and demand.

C. BORDOY UWC MAASTRICHT Carbon taxes are preferred because:  They make energy prices more predictable, benefitting firms, which need to plan their costs ahead of time.  Easier to design and implement, unlike cap and trade schemes, which require to set the cap at the right level and distributing the permits.  Can be applied to all users of fossil fuels. C&T schemes target one particular industry or small group of industries.

C. BORDOY UWC MAASTRICHT  Do not allow for manipulation by governments and interest groups.  Do not require as much monitoring and enforcement.  C&T schemes face strong political pressures to set the cap too high.  Carbon taxes are less likely to be used to restrict competition between firms. Some firms could buy up more tradable permits than needed and drive up their price in order to prevent new firms from entering the market.

C. BORDOY UWC MAASTRICHT Arguments in favour of C&T schemes:  Carbon taxes may be too low. Gov may be unwilling to set carbon taxes high enough for these to provide the necessary incentives.  Carbon taxes cannot target a particular level of carbon reduction, leading to uncertain carbon- reducing outcomes.  Carbon taxes are regressive, as lower income consumers wuld be affected proportionately more than higher-income consumers.  Carbon taxes must be adjusted for inflation, whereas adjustment is automatic with C&T schemes.