Green Tax Theories
UVM
Sept. 14, 2004
G. Flomenhoft,
CDAE, Gund Institute
CIRCULAR FLOW MODEL OF ECONOMY
“EXTERNALITIES”
SOCIETY
?
ECONOMY
ENVIRONMENT
?
Rivalness and Excludability
• Non-rival
– My use does not leave less for you
to use
– Market sells for a price,
discouraging use, but social cost of
use = 0, therefore market should not
supply
• Non-excludable
– One person can’t keep another from
using the good
– Consumer will not pay, market will
not supply
Must have a price to work in the free market!
Rival}
Excludable
Non-Excludable
Market Good:
land, timber, fish once
captured, farmed fish,
Open Access Regime:
(misnamed: Tragedy of the
commons)
Oceanic fisheries, timber
etc. from unprotected
forests, waste absorption
capacity, roads (congestible)
Potential market good
Non-rival} (Tragedy of the
“non-commons”)
but inefficient:
patented information,
Pond
Pure Public Good:
climate stability, ozone
layer, clean air/water/land,
Biodiversity, information,
habitat, life support
functions, social stability,
Freedom, democracy
Economic Theories of “externalities”
Coase Theorem
Pigouvian Taxes
Marginal disutility
Pigouvian Taxes (page 376)
How to internalize external costs?
Impose a tax = marginal external costs
Creates a property right for the state, using
Liability rule.
Pigouvian Taxes-problems
•Cannot accurately measure external costs
•Costs change with amount of pollution
•Firm may pay the costs
•Enforcement?
Pigouvian Taxes-advantages
•Firm with with lowest costs will make large
•Reductions
•Maintains micro-level freedom
•Biggest polluters may go out of business
•Or change facilities
•More palatable than “Command and Control”
Coase Theorem (page 177)
Assign property rights to polluter or to
Agent impacted. Makes no difference from
Efficiency standpoint
Marginal disutility
“Coal plant and the laundry”
Coal plant-right to pollute: laundry must pay
not to pollute
“Willingness to pay” (to avoid pollution)
Laundry-right to clean air: Coal plant must
Compensate laundry for dirty air.
“Willingness to accept” (If compensated)
In theory WTP&WTA are same!
In reality?????
Other Approaches
Regulation (command and control)
Cap and trade permits
Pigouvian subsidies
Abatement costs
ITQ-Individual transferable quotas
Eco-taxes
Rival}
Excludable
Non-Excludable
Market Good:
land, timber, fish once
captured, farmed fish,
Open Access Regime:
(misnamed: Tragedy of the
commons)
Oceanic fisheries, timber
etc. from unprotected
forests, waste absorption
capacity, roads (congestible)
Potential market good
Non-rival} (Tragedy of the
“non-commons”)
but inefficient:
patented information,
Pond
Pure Public Good:
climate stability, ozone
layer, clean air/water/land,
Biodiversity, information,
habitat, life support
functions, social stability,
Freedom, democracy
Stock-Flow/ Fund-service (page 72)
Stock-flow
Are materially transformed into what they produce
Can be used at any rate subject to use of capital
Productivity measured by physical units
Can be stockpiled
Are used up, not worn out
Fund-service
Are not materially transformed
Can only be used at a given rate
Productivity measured as output per unit of time
Cannot be stockpiled
Are worn out, not used up
The Valuation of Ecosystem Goods and
Services
Matthew A. Wilson
Gund Institute for Ecological Economics
&
School of Business Administration
Email: Wilson@bsad.uvm.edu
List of Ecosystem Goods and Services
ECOSYSTEM SERVICES
Gas regulation
ECOSYSTEM FUNCTIONS
Regulation of atmospheric chemical composition.
Climate regulation Regulation of global temperature, precipitation, and other biologically mediated
climatic processes at global, regional, or local levels.
Disturbance regulation Capacitance, damping and integrity of ecosystem response to environmental
fluctuations such as sea level rise.
Water regulation Regulation of hydrological flows.
Water supply
Erosion control and sediment retention
Soil formation
Storage and retention of water.
Retention of soil within an ecosystem.
Soil formation processes.
Nutrient cycling
Storage, internal cycling, processing, and acquisition of nutrients.
Waste treatment
Recovery of mobile nutrients and removal or breakdown of excess or
xenic nutrients and compounds.
Movement of floral gametes.
Pollination
Biological control
Refugia
Food production
Raw materials
Genetic resources
Trophic-dynamic regulations of populations.
Habitat for resident and transient populations.
That portion of gross primary production extractable as food.
That portion of gross primary production extractable as raw materials.
Sources of unique biological materials and products.
Recreation
Providing opportunities for recreational activities.
Cultural
Providing opportunities for non-commercial uses.
Adapted from Costanza et. Al. (1997) “The Value of the World’s Ecosystem Services and Natural Capital”
Nature, vol. 387 pp.253-260
Techniques for Valuing Ecosystem Services
•Avoided Cost (AC): services allow society to avoid costs that would have been incurred in
the absence of those services; flood control (barrier islands) avoids property damages, and
waste treatment by wetlands avoids incurred health costs.
•Replacement Cost (RC): services could be replaced with man-made systems; natural waste
treatment can be replaced with costly treatment systems.
•Factor Income (FI): services provide for the enhancement of incomes; water quality
improvements increase commercial fisheries harvest and thus, incomes of fishermen.
•Travel Cost (TC): service demand may require travel, whose costs can reflect the implied
value of the service; recreation areas attract distant visitors whose value placed on that area
must be at least what they were willing to pay to travel to it.
• Hedonic Pricing (HP): service demand may be reflected in the prices people will pay for
associated goods: For example, housing prices along the shore of pristine freshwater lakes
tend to exceed the prices of inland homes.
•Contingent Valuation (CV): service demand may be elicited by posing hypothetical
scenarios that involve some valuation of alternatives; people would be willing to pay for
increased water quality in freshwater lakes and streams.
•Marginal Product Estimation (MP): Service demand is generated in a dynamic modeling
environment using production function (i.e., Cobb-Douglas) to estimate value of output in
response to corresponding material input.
•Group Valuation (GV): This approach is based on principles of deliberative democracy and
the assumption that public decision making should result, not from the aggregation of
separately measured individual preferences, but from public debate.
Full World or Empty World?
Valuation of Non-Market Social Services: