Environmental Regulations in
Developed and Developing
Countries
Real-world applications dealing
with industrial pollution
Types of regulations considered
Price instruments (taxes, fees, fines,
tariffs)
Quantity instruments: quotas, limits
Tradable permits
Technology restrictions
Liability rules
Information disclosure
Sulfur emissions: acid rain
Sulfur a major precursor to acid rain
Acid rain has different effects
depending on physical factors where it
is deposited
Scandinavia: old rocks, very sensitive
England: not sensitive
European policies for sulfur
Encourage switching energy sources
from oil & coal to gas (UK),
hydro/nuclear (Sweden, France)
Performance standards (sulfur content
of fuels)
Design standards (mandatory
technology)
European policies for sulfur
Taxes (energy or fuel)
Sweden, Norway, Denmark ~$2000/ton
Other European ~$50/ton (Italy, France,
Spain)
Though to be modestly effective.
Responsible for 30% reduction in Sweden.
Tradable sulfur permits (US)
1990 CAAA, Title IV established market
for SO2 among electric utilities.
First time in U.S.
Issued 9 million 1-ton permits
Permits free, based on grandfathering
Prove compliance at end of year.
Can sell or bank permits
Price: $100 - $500/ton (1993-2001)
Tradable sulfur permits cont’d
Marketable permits have potential to
reduce control cost when
heterogeneous abatement cost.
Heterogeneous SO2 polluters in US
Cost savings due to trading: $800
million
Nitrogen oxides (NOx)
The other major precursor to acid rain
Technically more difficult to monitor,
predict, and abate.
Many approaches used to abate
Refunded emissions payments:
Sweden
NOx reduced by 20% (but SO2 reduced
by 80%).
Tax on electricity prod. of $4000/ton
Revenues returned to polluting
companies depending on production
Clean companies, net gain. Dirty, net loss.
Very successful, politically viable
Ground-level ozone: NOx in US
CAAA specifies:
Reduce NOx by 400,000 tons/yr between
’96-’99 and by 1.2 million tons/yr after.
E.g. RECLAIM in LA basin
Aims for 80% reduction in NOx and SOx
from ’94-’03.
Each licensed source has to reduce
emissions – if over-comply, can trade
Green tax reform in Europe
Sweden and Germany in particular
Use environmental taxes to finance
decreases in other taxes
Highly criticized on many grounds.
Not necessarily large enough to do
much good.
E.g. oil ($100/m3), coal ($100/ton), also
natural gas, LPG, electricity
Liability rules: Superfund
Deals with dumping of toxic waste
E.g. Love Canal (near Niagra Falls)
21,000 tons toxic chemicals buried
$100 millions spent on cleanup, $14 billion
in private lawsuits
Superfund 1980, tax petroleum,
chemical industries. Proceeds to clean
up hazardous waste sites.
Superfund continued
By 1995 $11 billion collected
By 2000 757 Superfund sites completed.
EPA had reached settlements with
polluters totaling $16 billion.
Use strict & retroactive and joint liability
With limited knowledge, liability a good
approach (maybe better than mkt based)
May require liability bond as a deposit
Information disclosure
Toxic Release Inventory (TRI) started in 1986
to provide public information about release of
toxic substances
640 chemicals
Also voluntary agreements (e.g. 33/50)
Local environmental groups use TRI to
pressure & report on industry
More info  better economic performance.
Good starting point for new regulations.
Global policy: Ozone
Montreal Protocol (1985) on substances
that deplete the ozone layer (into force
1989).
Most countries developed individual
plans to ratchet down production
Permits traded but not banked.
Some countries restricted imports on
ozone destroying substance products.
Global climate change
1997 Kyoto Protocol – mainly
industrialized countries agreed to %
reductions from 1990 levels (avg 5%)
US continues to reject Kyoto
Distribution of current & future burden
“hot air”, commitment from developing
Permits, int’l taxes, non-carbon
substitutes, carbon sequestration
Incentives for innovation
Policy
Gains to innovating firm
Command & Control
none
Best available technology Performance Standards
++
Emissions tax
+++
Auctioned permits
+++++
Grandfathered permits
++
Tradable performance
standards
++
Environmental regulations in the
developing world
Often environment is low on policy
priority list – urge to industrialize
Policy focus: employment & income
Diverse instruments used, hard to
generalize.
Typically market based instruments not
as widely used or effective.
Environmental Kuznet’s Curve
Emissions
Early phases of economic
growth tend to  pollution
As income rises, clean
environment is valued
more, emissions decline
But v. difficult to estimate
due to lack of time series
Income
Environmental charges & funds
Central & East Europe (planned
economies): high pollution last few
decades
Attract limited international capital
Instituted some environmental taxes
But no bite until decentralized
Poland: careful CBA to attract debt-fornature, unusually successful
Planned economy emissions fees
Sulfur, NOx, carbon, some particulates,
lead
Transportation tolls
Water extraction charges, water
pollution fines, waste management
fees, fertilizer and pesticide fees
Regulations in China
Most populous, one of poorest, one of
most polluted countries
Air quality in Beijing:  100 tons SO2, 
one statistical life (cost = $300)
1979 law allows charging for pollution,
by 1994 $2 billion collected.
Fees charged when emissions above max.
Fees too low to achieve standards.
Fees in Rio Negro, Colombia
Colombian economy growing quickly
Water/air pollution major problems
1993 law that environmental damages
must be taken into account
Stipulates use of economic instruments
Fees implemented: 28% decline in
pollution in first 6 months
Voluntary emissions control
Informal sector in Mexico: brick making
Difficult to monitor, regulate (similar to
non-point source pollution)
20,000 brick kilns burn nasty stuff
Too difficult to enforce ban on dirty fuels
Subsidize propane, voluntary switch
Zoning for certain activities
Involve local grassroots
Info & institutions: Indonesia
Rapid economic growth – drastic exploitation
of resources
“Program for Pollution Control Evaluation and
Rating” (PROPER) – similar to TRI
Reporting, evaluating, assisting firms
Grades each industry, reports in press
Very successful
Other countries have adopted similar (Mexico,
Phillippines, Papua New Guinea)…