Pluses and Minuses of a Carbon Tax

Either a tax or a cap can put a price on climate pollution. The goal is to reduce it. Published as Letter to the Editor in the New York Times on June 15th, 2015

Controlling Stocks and Flows to Promote Quality: The Environment, With Applications to Physical and Human Capital

Our analysis melds two traditional approaches to promoting quality. The first is restoring the stock of quality. The second is curbing its flow of deterioration. Although both approaches are widely used in real world settings, analytic models have tended to focus on one strategy or the other. We consider a class of problems, which we call SFQ' problems, in which both stocks and flows can be controlled to promote quality. We develop our results in the context of environmental quality, drawing on real-world examples from atomic wastes to zebra mussels. But the lessons are general, and we show how they apply to promoting the quality of both physical and human capital. We first study optimal policies in the limiting cases when only abatement or restoration is possible. We then focus on the full SFQ world, where both approaches can be used. We show that the optimal policy employs both instruments. Moreover, when combined optimally, neither strategy takes the form it would in the absence of the other.

The Optimal Management of Environmental Quality with Stock and Flow Controls

We characterize environmental quality as a stock, and its rate of deterioration as a flow. We consider a class of problems, which we call "SFQ" problems, in which both stocks and flows can be controlled to promote the quality of a resource stock. Abatement (curbing the flow) and restoration (restoring the stock) are interdependent tools in such problems. Under the optimal policy, periodic restoration complements positive but variable abatement that partly stems the quality decline. The preferred balance between the two strategies depends on environmental and economic factors. If flows are low enough, or if abatement is sufficiently inexpensive relative to restoration, optimal abatement may be sufficiently intense to offset the expected deterioration and produce an equilibrium in expectation. When deterioration is more rapid or more variable, when abatement is more expensive, or when restoration is less costly, the optimal policy relies more on restoration. We apply the analysis to the restoration of an endangered species, and show how it could illuminate a range of other problems in the environmental arena. But the lessons are general, and we briefly discuss how they apply to the management of both physical and human capital stocks.

The General Equilibrium Incidence of Environmental Mandates

Pollution regulations affect factor demands, relative returns, production, and output prices. In our model, one sector includes pollution as an input that can be a complement or substitute for labor or capital. For each type of mandate, we find conditions where more burden is on labor or on capital. Stricter regulation does not always place less burden on the better substitute for pollution. Also, restrictions on pollution per unit output create an “output-subsidy effect” on factor prices that can reverse the usual output and substitution effects. We find analogous effects for a restriction on pollution per unit capital

What Did the Market Buy? Cost Savings Under the U. S. Tradeable Permits Program for Sulfur Dioxide

Title IV of the 1990 Clean Air Act instituted a nationwide system of tradeable pollution permits for sulfur dioxide emitted by electric power plants. This paper asks: What were the cost savings from using a market-based instrument, rather than a more conventional prescriptive approach? Using an econometric model of the decision whether or not to install a scrubber under different policy regimes, I simulate the decisions that would have been made under prescriptive regulation. I find that under an uniform emissions-rate standard chosen to achieve the same aggregate abatement as actually occurred, the total number of scrubbers would have been about one-third higher than under the baseline cap-and-trade program. The change in the distribution of scrubbers among units is more striking. Under prescriptive regulation, installed scrubbers would have had systematically higher scrubbing costs than they actually did, and would have been installed at plants with significantly higher costs of switching to low-sulfur coal (the principal alternative to scrubbing). At the aggregate level, these effects translate into aggregate costs of compliance that would have been greater than actual costs by an estimated $150 million to$270 million per year. Thus the use of the market-based instrument resulted in cost savings of between 16% and 25%. The results provide a concrete demonstration of the influence of policy design on both unit-level choices of abatement technique and aggregate abatement costs.market-based instruments, prescriptive regulation, environmental policy, pollution control, sulfur dioxide, electric power, cost savingsmarket-based instruments, prescriptive regulation, environmental policy, pollution control, sulfur dioxide, electric power, cost savings

Market Effects of Environmental Regulation: Coal, Railroads and the 1990 Clean Air Act

Title IV of the 1990 Clean Air Act Amendments introduced a cap-and-trade system for sulfur dioxide emissions from electric power plants in the United States. This paper analyzes the effects of that regulatory change on the prices charged by the two railroads that hauled low-sulfur coal east from Wyoming.We estimate the effect of the tradeable permits regime by comparing prices at affected plants (called “Table A plants”) before and after the allowance market took effect, and by comparing prices at those plants to prices at unaffected plants. We show that after Title IV took effect, the delivered price of low-sulfur coal — controlling for the minemouth price of coal and the variable cost of transportation — rose at Table A plants within approximately 1000 miles of the Powder River Basin, and fell at Table A plants located further away. This shift in the delivered price schedule of PRB coal is consistent with a theoretical model of the effects of emissions regulation on demand for low-sulfur coal, and the corresponding optimal pricing strategy by a carrier with market power. Our results suggest that the railroads were able to price discriminate among power plants on the basis of the environmental regulations governing the plants