Chapter 6
The Economics of Environmental Regulation II
Chapter Summary
This chapter is in some respect an extension of Chapter 5. It provided the theoretical foundation of a
relatively new market-based pollution-control policy instrument—the transferable emission credits
(TECs). The ingenuity behind this policy instrument is the creation of ‘artificial’ markets for pollution
rights that are traded as commodities. This chapter discussed both the strength and limitations of
this rather novel policy instrument. The second issue presented in this chapter is a thorough
discussion of the macroeconomic effects of environmental regulations—a rather interesting and
controversial subject. The controversy arises from the inconsistent empirical findings to support
what appears to be that conventional wisdom, that is, ‘the existence of a trade-off between
employment and environmental regulation’.
A. Review and Discussion Questions: Transferable Emission Credits (TECs)
1. Emission credit works with the notion that we can treat the services of the environment to
assimilate or store pollution as commodities that can be exchanged in the market place. Would
you consider this attempt to ‘commodify’ the environment as being blatantly unethical? If not,
how do you respond to those who uphold this particular view?
2. Under the TECs regime, what are the three important functions of government as regulators of
pollution emissions? Be specific.
3. TECs is constructed under on the basis of four specific postulates or assumed conditions. Identify
these postulates.
4. Make sure that you fully understand the discussion presented in on pages 97 and 98 to show the
theoretical explanation on how TECs works. Make sure you understand Figure 6.1.
5. Explain why an emission trading system is expected to work better when the number of parities
(pollution sources) involved in the exchange of credit increases.
6. As argued on page 99 of your textbook, the effectiveness (efficiency) of emission trading policy
can be further enhanced by using additional policy features, such as bubble, banking, and offset.
You may use Google to find more information on these three policy features.
7. In your textbook (pp. 102–106), the practical application of TECs is evaluated using a case study,
the United States experience with acid rain program, established under Title IV of the 1990
Clean Air Act Amendment. The goal of the acid rain program has been to cause major reduction
in the emission of sulfur dioxide (SO2), the main precursor of acid rain, from power plants. The
evidence so far suggests that the acid program has been successful. Does this in any way suggest
that TECs can be designed to effectively control several other national and international
pollution problems, such as CO2 emission to reduce the risk of global warming or ocean pollution
from oil spills? Discuss.
B. Review and Discussion Questions: Tradeoff between Employment and Environmental
Regulation
© 2014 Ahmed Hussen
1. Why do you think, in general, the ‘public’ tend to perceive that expenditures to protect the
environment often have a negative effect on jobs? In other words, a trade-off exists between
jobs and employment.
2. What aspect(s) of the theoretical arguments for the existence of negative trade-off between
jobs and environmental protection expenditure (EPE) do you find to be most convincing?
Explain.
3. What aspect(s) of the theoretical arguments for the existence of positive trade-off between jobs
and environmental protection expenditure do you find to be most convincing? Explain.
4. Were you surprised by the empirical evidence on the trade-off between jobs and environmental
protection expenditures? Why or why not?
© 2014 Ahmed Hussen