Tradable Permits in Developing Countries: Evidence from Air Pollution in Santiago, Chile

Santiago was one of the first cities outside the OECD to implement a tradable permit program to control air pollution. This paper looks closely at the program’s performance over the past ten years, stressing its similarities and discrepancies with trading programs implemented in developed countries, and analyzing how it has reacted to regulatory adjustments and market shocks. Studying Santiago’s experience allows us to discuss the drawbacks and advantages of applying tradable permits in less developed countries.air pollution, environmental policy, tradable permits, developing countries

Policy spillovers in the regulation of multiple pollutants

We analyze the interplay between policies aimed to control transboundary and local pollu- tants such as greenhouse gases and particulate matter. 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, potentially with different instruments that are designed according to some specific agenda. We show that the choice of regulatory instrument and the timing of the regulations matter for efficiency. Emissions of the local pollutant are distorted if the regulators anticipate that transboundary pollution will later be regulated through emission caps. The regulation is too stringent with diseconomies of scope, and not enough with economies of scope. In contrast, we obtain efficiency if the transboundary pollutant is regulated by tax provided that the revenues from taxing emissions are redistributed to the local communities in a lump-sum way

The informational value of environmental taxes

We propose informational spillovers as a new rationale for the use of multiple policy instruments to mitigate a single externality. We investigate the design of a pollution standard when the firms’ abatement costs are unknown and emissions are taxed. A firm might abate pollution beyond what is required by the standard by equalizing its marginal abatement costs to the tax rate, thereby revealing information about its abatement cost. We analyze how a regulator can take advantage of this information to design the standard. In a dynamic setting, the regulator relaxes the initial standard in order to induce more information revelation, which would allow her to set a standard closer to the first best in the second period. Updating standards, though, generates a ratchet effect since the low-cost firms might strategically hide their cost by abating no more than required by the standard. We provide conditions for the separating equilibrium to hold when firms act strategically. We illustrate our theoretical results with the case of NOx regulation in Sweden. We find evidence that the firms that are taxed experience more frequent standard updates

The informational value of environmental taxes

We propose informational spillovers as a new rationale for the use of multiple policy instruments to mitigate a single externality. We investigate the design of a pollution standard when the firms’ abatement costs are unknown and emissions are taxed. A firm might abate pollution beyond what is required by the standard by equalizing its marginal abatement costs to the tax rate, thereby revealing information about its abatement cost. We analyze how a regulator can take advantage of this information to design the standard. In a dynamic setting, the regulator relaxes the initial standard in order to induce more information revelation, which would allow her to set a standard closer to the first best in the second period. Updating standards, though, generates a ratchet effect since the low-cost firms might strategically hide their cost by abating no more than required by the standard. We provide conditions for the separating equilibrium to hold when firms act strategically. We illustrate our theoretical results with the case of NOx regulation in Sweden. We find evidence that the firms that are taxed experience more frequent standard updates

Fiscal Federalism, Interjurisdictional Externalities and Overlapping Policies

In this paper, we analyze the effects of the interaction between national and local policies designed to reduce an environmental externality that causes environmental damages both nationally and locally. We formulate a theoretical model to develop hypotheses regarding the combined effects of such policies on the stringency of the local policies and on firms’ emissions reductions. To test our hypotheses, we use actual data for Sweden, where emissions of nitrogen oxides from combustion plants are subject to a heavy national tax and to individual emissions standards set by county authorities. Our analytical findings suggest that it is unlikely that local regulators will impose emissions standards stringent enough to achieve further reductions than those induced by the national tax. This is confirmed in our data, where most emissions reductions can be attributed to the national tax and the effects of the emissions standards are not significant.JEL classification: H77, Q58, H23, D6

Environmental policy, fuel prices and the switching to natural gas in Santiago, Chile

To reduce air pollution in Santiago, switching to natural gas coincided with major new policy. The policy brief reflects on a study that analyzed factors driving the pattern of switching to natural gas in Santiago, and assessed the influence of environmental regulations and market forces. Emissions of particulate matter, which produce the worst health effects, were reduced by about 67%. To some extent, the lower price of natural gas worked as an economic instrument increasing the relative price of pollution

Economic interests cloud hazard reductions in the European regulation of substances of very high concern

Here we investigate how the conflicts between hazard reduction and economic interests have shaped the regulation of substances of very high concern (SVHCs) under the Authorization program of the European chemical regulation Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH). Since regulation starts with listing SVHCs on the Candidate List, we analyze the relative importance of toxicological properties, economic motivations, and available scientific knowledge on the probability of inclusion on the Candidate List. We find that the most important factor in whether a substance is listed is whether it is being produced in, or imported into, the European Economic Area (EEA), with the regulators less likely to place a substance on the list if it is currently being produced or imported in the EEA. This evidence suggests that regulators have listed chemicals of secondary importance leading to lesser than anticipated hazard reductions, either because production and imports had already ceased before the listing, or because the compound has never been produced or imported in the EEA at all

Environmental policy, fuel prices and the switching to natural gas in Santiago, Chile

In this study I analyze the pattern of adoption of natural gas in Chile and the drivers behind it. For doing that I have a panel data set of stationary sources from 1995 to 2005 that allows me to identify either the role of environmental policy as the impact of the energy cost inducing the switching to this clean fuel. Besides, I evaluate the performance of the system of environmental contingencies, a non- traditional policy instrument created in Chile in the early nineties, that seemed strongly correlated with the switching. According to the data most of the adoption of natural gas was induced by the lower cost of this fuel, showing that sources were more sensitive to the cost of energy than to the environmental regulation

The informational value of environmental taxes

We propose informational spillovers as a new rationale for the use of multiple policy instruments to mitigate a single externality. We investigate the design of a pollution standard when the firms’ abatement costs are unknown and emissions are taxed. A firm might abate pollution beyond what is required by the standard by equalizing its marginal abatement costs to the tax rate, thereby revealing information about its abatement cost. We analyze how a regulator can take advantage of this information to design the standard. In a dynamic setting,the regulator relaxes the initial standard in order to induce more information revelation, which would allow her to set a standard closer to the first best in the future. Updating standards, though, generates a ratchet effect since a lowcost firm might strategically hide its cost by abating no more than required by the standard. We characterize the optimal standard and its update across time depending on the firm’s abatement strategy. We illustrate our theoretical results with the case of NOx regulation in Sweden. We find evidence that the firms that pay the NOx tax experience more frequent standard updates and more stringent revisions than those who are exempted