Environment regulation in the case of non-stationary pollution

I. Sustainability

5. The economics of environmental pollution

5.18 Environment regulation in the case of non-stationary pollution

relatively rarely focuses on the issue of the economic regulation of pollution that occurs due to malfunctions and accidents, which typically cause the worst environmental-ecological problems.

Environment economic analyses normally suppose the existence of point-like pollution sources with stationary emissions in most cases. However, in practice, the cases that have most public impact (Bhopal, Chernobyl, etc.) are due to accidents, which is why this special type of pollution deserves more attention.

It is largely due to a lack of regulation that some of the pollution events that originate from accidents and malfunctions create ‘issues’, thereby enabling us to study all the deﬁ ciencies of environment regulation.

In recent years, a signiﬁ cant amount of money has been spent on efforts to eliminate operational hazards. In Great Britain, techniques called ‘hazop’ (haz-ard and operability studies) and ‘hazan’ (haz(haz-ard analysis) have been developed (Kletz, 1985).

Hazop methods explore systematically and as completely as possible the sources of danger that exist during a process, and the options for their elimi-nation and protection against their consequences. The hazan technique helps with estimating the signiﬁ cance of sources of danger and deciding how far it is worth incurring the extra costs of any changes needed to reduce the risk.

These decisions are very complex and often involve serious social conﬂ ict.

Legislators are called on to decide about issues such as what fatality rate is

‘acceptable’ to society, which involves taking a great deal of responsibility.

Posing such questions may seem cynical, but safety comes at a price, and higher levels of safety consequently cost more. Resources are not limitless, and money spent on improving safety must be spent in the most efﬁ cient way possible. We cannot afford to continue with hazardous operations without an analysis of possible sources of danger, or consideration of the probability and severity of accidents, or without calculating the hazard to life caused by tech-nological processes. Brieﬂ y: we cannot bury our heads in the sand.

On the other hand, we should not throw money out of the window in the spirit of humanism in an attempt to completely eliminate hazards which we already know of, while other – possibly more serious – sources of danger are left out of consideration.

The prevention of environmental disasters that originate from accidents and malfunctions requires special environmental protection regulation. Existing laws need to be reinforced with stricter ﬁ nancial and civil rights sanctions. To avoid speciﬁ c types of pollution and to reduce risks, one efﬁ cient tool would be to force companies to be legally liable, regardless of who is at fault. In such a case, entre-preneurs would have to take responsibility for the consequences of their activities even if misconduct on their part could not be established. This suggestion – es-pecially for entrepreneurs used to the ‘polluter pays’ principle – may sound unfair, but it would make improving safety measures worth it for companies.

The environment pollution risk of malfunctions and other accidents can also be reduced by adequate societal preparations for eliminating the conse-quences of such mishaps. International experience proves the usefulness of maintaining suitable emergency response organisations. However, it is still not clear who (and in what proportions) should bear the costs of the maintenance of such emergency organisations, nor what size and technical equipment re-quirements are justiﬁ ed.

5.19 The issue of infl ation and price elasticity regarding green taxes A further issue with Pigovian taxes is that, due to inﬂ ation, taxes ‘devalue’ and lose their power to motivate. This is what happened in a very short time with some environmental taxes (for example, fuel taxes) that were applied in Hun-gary. In consequence of the inﬂ ation that is customary in developed countries, taxes need to be increased on an ongoing basis, which usually causes social protest. A process of tax indexation would be relatively easy to manage, but would lead to inﬂ ation in itself. The inﬂ ationary effect of taxes is the main ar-gument against environmental taxes in any case, and justiﬁ es the wariness of politicians about these instruments.

The main purpose of the imposition of environmental taxes is very frequently to use the revenue they generate in environmental protection. This was the purpose of the fuel product fee in Hungary, and this is the primary goal of the packaging material product fee, and the product fees imposed on batteries and tyres as well.

In the case of fundraising taxes, authorities may easily be surprised if they leave the price elasticity of consumption out of consideration. Among product groups usually subject to eco taxes (e.g. energy sources, ciga-rettes, packaging materials, artiﬁ cial fertilizers), some are subject to dra-matic decreases in demand when their price rises (for example, aerosol dispensers with gas propellants; see Figure 5-17.) while there are others with clearly non-elastic demand. A 300% price rise in crude oil, for exam-ple, according to German statistics, decreased demand for oil by ‘only’

30% (see Figure 5-18.).

Figure 5-17. Aerosol dispensers with gas propellants – the price elasticity of consumption (Weizsäcker et al., 1997)

From the perspective of ﬁ lling up environmental funds using taxes, the tax levied on aerosol dispensers with gas propellants is a rather insecure revenue source, because at a tax rate of 100%, demand drops by half, and at even higher tax rates the fall in demand may result in an absolute decrease in tax revenue. Taxes that are levied on such products will mean that they lose market share. This also means

that substantial environmental taxes must be levied on products with high price elasticity if the goal is to achieve a dramatic reduction in their consumption. This is exactly what the tax on CFC-based aerosol dispensers was meant to achieve.

For environmental protection authorities, taxes imposed on products with a stable demand are a safe source of revenue. As Figure 5-18. shows, the curve indicating revenue linearly increases in such cases.

It is true, however, that a green tax receives more social support if it is im-posed on a product with elastic demand than one with non-elastic demand.

No wonder there is such resistance in the US to taxing fuels, while otherwise the environmental attitude of American society is considered to be fairly posi-tive – at least by American experts!

Figure 5-18. Crude oil – the price elasticity of consumption (Weizsäcker et al., 1997)

5.20 Accumulating externalities

In the literature, the theory of having decentralised state functions dates back to the 1950s. The theory of ﬁ scal federalism was most prominently advocated in the works of Wallace Oates. Later, Oates’ followers published a collection of essays to pay homage to the work of the outstanding scholar, whereby they also promoted the concept of environmental federalism on a wider scale. The debate about the approach known as the TOBM (Tiebout, Oates, Buchanan, Musgrave) model is periodically reignited both in the economic literature and in public policy. At the level of the EU, one element in that debate is the incorpo-ration of the principle of subsidiarity into the Maastricht criteria, which makes a general organising principle of the need to decentralise state functions. To-day it is generally accepted that local government and local civil society play a vital role in the provision of local public goods. Since the provision of local public goods largely requires fundraising and the allocation of funds, a major part of the related task involves the ﬁ eld of ﬁ nance. This book addresses both ﬁ nances at the level of local government, and the civil initiatives periodically prompted by dissatisfaction with the ‘ofﬁ cial’ ﬁ nancial system. The theory of

sustainable development and global issues such as climate change, loss of biodiversity, or demographic problems such as overpopulation and ageing in certain regions, as well as massive migration due to regional differences in development, have added intriguing new dimensions to the interpretation of local public goods.

Understandably creating a stir, the otherwise excellent Stern report (Stern et al., 2007) attributed climate change to the failure of the market, a debatable assertion. It is to be feared that climate change is not only attributable to mar-ket failure, but to the general failure of humankind. Even if energy use could be priced appropriately, people would still go on travelling, heating and air conditioning, only slightly less. This would at most decelerate but by no means stop harmful emissions. The market is typically an ex-post regulator rather than ex-ante one. Foresight has never been an attribute of the market; this is a human characteristic, in fact mostly possessed by people involved in science who are not likely to be concerned with the current state of the market. This is a distinction worth addressing, because if climate change was ‘a mere mar-ket failure’ the problem could be solved by means of economic intervention.

However, it is not particularly appropriate to consider climate change purely as a market failure. It is a mistake to think that the heavy taxation of fossil fuels could stop the increase in the concentration of CO₂. Our wasteful consumption habits and values will certainly not be changed by the market, which is capable of producing the very opposite effect. As soon as demand was shown to exist for the perhaps most energy intensive new form of tourism, the ‘product’ was introduced to market almost immediately. Just one week after the release of an ominous EU report on climate change, humankind embarked on tourist voyag-es into space, and suppliers are now looking to diversify their offer. Therefore, despite the fact that climate change is not considered only a case of market failure, an inquiry is warranted into the speciﬁ cities of climate change as an externality. Climate change is commonly seen as a new type of externality, but one signiﬁ cantly different from the externalities addressed by classic economic authors. The key differences are that, as an externality, climate change

• is global in terms of both its root causes and consequences – as re-gards the effect of the emission of an additional ton of carbon dioxide, it makes no difference whether it occurs in Australia or Europe, whereas in the case of other air pollutants, the environmental circumstances of the emissions are very relevant to the speciﬁ c harm caused to health and other effects;

• may potentially evolve over the course of centuries due to the effects of greenhouse gases, and there is often a lag in the climate’s response to changes in concentration, with long-term and permanent effects;

• is unpredictable both in terms of risks and economic consequences;

• probably produces irreversible effects, leading to economic conse-quences that are not marginal. The effects of climate change may have a signiﬁ cant impact on members of society, and cannot be addressed by simply ‘redesigning’ some projects.

Owing to these speciﬁ cities, climate change cannot be addressed using the same economic approaches as conventional externalities. The theories of both Pigou and Coase are based on marginal analyses of the cost and beneﬁ t type, and seek to identify optimums along MAC and MEC curves. Climate change is not marginal in nature, as any minute shift along the axis of CO₂ emissions could lead to changes that are in many cases unpredictable and virtually im-possible to map on the axis of marginal damage. The effect of current pollution abatement efforts also depends on the characteristics of future emissions and abatement attempts. It will be readily apparent that as regards the CO₂ con-centration of the Earth as a whole, in principle it is completely indifferent where emissions are made and where they are reduced. Conversely, in terms of eco-nomic effects, the ecoeco-nomic circumstances under which remediation efforts are made do actually matter. For all these reasons, conventional techniques of analysis may only serve as points of reference, and a novel approach is need-ed to solve the problem. Achieving lower concentrations of CO₂ takes greater effort, which will act as a major drag on economic growth. The actual effects of climate change may only be shown on balance sheets. Initially indicating a deterioration in welfare, the related curve is of major concern to both policy makers and theoreticians since it ‘demands’ the seemingly altruistic sacriﬁ ce of present generations, implying a certain intergenerational inequality. It may appear that, as regards climate policy, present generations are giving up a part of their welfare (by investing in natural capital) to protect future generations against a radical decline in welfare. Obviously, in moral terms there is presently a need to make up for the negligence of generations following the industrial revolution, and it is precisely in response to this that some of the current popu-lation are asking, ‘Why these generations?’, and, ‘Of all people, why us?’

5.21 Towards strong sustainability:

Expanding the notion of negative environmental externalities After many years of teaching about environmental economics and external costs, there seems to be nothing more natural for us than to accept that ex-ternal effects are unintended. The presence of a smoking chimney or exhaust pipe itself is not the ultimate purpose of activity, of course. The purpose is to produce electricity or move from point A to point B in space, and any envi-ronmental load or pollution is only an unintended by-product of this process.

However, by broadening our view and studying all of the possible

technologi-cal options for achieving our goals it is possible that we will come to realize that these outcomes are not so natural and unintended. The use of a speciﬁ c technological solution clearly reﬂ ects values and preferences because we also accept the distribution of the costs created by the chosen technology. This choice ultimately informs us not only about the fate of ‘third persons’ who unintendedly suffer, but also tells a lot about the ‘ﬁ rst persons’ (producers), and second ones too (consumers). These individuals accept the technological solution by which a speciﬁ c product or service is ‘manufactured’, and they all accept the patterns of cost distribution associated with the related production and consumption by opting for a speciﬁ c technology.

Of course, producers and consumers can all refer to the general status quo by which technological practices are generally accepted by humankind, often in historical terms measured in hundreds of years. If a farmer uses artiﬁ cial fer-tilizers and chemicals to decrease their own costs and increase productivity, is this an example of intentional ‘cost spreading’? Is the farmer really freely able to choose an alternative; can they employ a more environmental and costly technological solution in an economic system based on competition?

When analysing ‘intention’ we never should forget the logic of our market-based economic system with the principle of proﬁ t maximization at its core. Of course, proﬁ t has two basic elements: revenue and cost. Our focus is on the latter: cutting costs means an increase in proﬁ t, all else being equal. We usually describe technologies that operate at lower costs as better, more powerful, and efﬁ cient. But we seldom investigate the source of this efﬁ ciency, which might be easily found by widening the scope of analysis: the fact is usually that costs are externalized to people who live far away in space and/or time (Read, 2001; Hepburn et al., 2010); and/or, using an even wider analysis, by stepping over the boundaries of our anthropocentric world-view, by offsetting the cost to other living species like hens, pigs and other animals (see also Singer, 1995) which provide food and basic ecological services for our welfare, or just for our very existence.

In a ‘full world’ where frontiers disappeared long ago the sources of gains are usually losses somewhere else in space and time, and lots of scientiﬁ c information about the potential costs of advanced technologies is available (or will shortly become available) to a wide audience.

Thus the concept of negative external costs can be broadened. The core of the concept of externalities (see Chapter 5.2) is that disadvantageous effects are left uncompensated, while other assumptions may be systematically re-moved. Thus, using a broader concept of externalities, we allow that a negative impact may be suffered by a second person (a consumer), by a ﬁ rst person (a producer) or even by a non-person (for example, a group of animals). The pur-suit of proﬁ t by cutting costs in a highly competitive environment may result in cost-spreading strategies which are fully legal and rational in terms of economic

theory that is based on proﬁ t maximization; and are fully rational – if not always completely legal – in standard business practice. Thus, even producers as ﬁ rst persons might use methods which are detrimental and unhealthy for them-selves to meet the demands for low-priced products of monopsonistic buyers (see also Princen, 1997), especially in the developing world, but also elsewhere.

But the concept of externalities may also be broadened by removing the assumption that the effect is unintended. As mentioned, when well informed about the broad consequences of a technology or method it is hard to believe in the ‘unintendedness’ of producers who use a technology at a lower cost;

and it is also hard to suppose that consumers who buy a product or service at a lower price than could be produced without externalized costs do so un-intentionally. Table 5-1. summarizes all the possible cases of our broadened concept of externalities.

1^st person 2^ndperson 3^rd person Non-persons unintended

intended

Table 5-1. A broadened concept of negative externality. According to the deﬁ nition, the ﬁ rst person is the producer, the second is the consumer, the third person is not involved

in the market transaction, and animals are ‘non-persons’. The shaded area indicates what is covered by the classic deﬁ nition of externality. (author’s own compilation)

Let us see the microeconomic consequences of the above! Suppose that the marginal net private beneﬁ t (MNPB) function is linear under perfect market conditions according to Fig. 5-19. As a basic scenario, we suppose that all costs are borne by the producer, and no external costs arise. Then the socially optimal level of production (Q_opt) is equal to the level of production that cre-ates maximum proﬁ t (Q_max). In this case, the total proﬁ t of the user (and thus the whole of society) is represented by the triangle A, and there is no need for intervention.

However, in the case of ‘material cost-shifting technological development’

(Kocsis et al., 2018), as production costs decrease and proﬁ ts rise for the pro-ducer, external costs are generated for the broader community (including other species). Using our linear model – for the case of technological development – the MNPB function ﬂ attens and more product is created in the same period for a higher private proﬁ t (all else being equal; see the sum of triangles A, B, and C). However, in a ﬁ nite world, and in the case of destructive development, all

In document Sustainability, environmental economics, welfare (Pldal 166-0)