Transcript Document
Environmental Economics The Agrofood Chain, Unit S2M18 Alban THOMAS [email protected] 1 Course outline 3 – Resource use and pollution, key instruments for public policy 3.1 – Natural resources as production inputs or « not-so-basic » commodities 3.2 – Valuating amenities from natural resources and the environment 3.3 – A typology of pollutions and environmental damages 4 – Environmental and economic policies – Applications to agriculture and agrofood chain 4.1 – The need for regulating pollution and water use 4.2 – Welfare and abatement cost, a production-side approach 4.3 – Evaluating and regulating agrofood industrial emissions 4.4 – Regulating irrigation and emissions from agriculture 2 3 – Resource use and pollution, key instruments for public policy Purpose: The link between human activity and the environment Definition of environmental values Typology of environmental damages Introduction to Cost-Benefit Analysis (CBA) Which policy instruments for which damages ? Keywords: Point and Nonpoint source pollution Environmental valuation Cost-Benefit Analysis Pigovian tax 3 3.1 – Natural resources as production inputs or « not-so-basic » commodities «Anthropic » (man-oriented) vision : natural resources are used for production and consumption activities The environment is considered a « service supplier » or a « good supplier » Environmental damage is defined as a lack of services from the environment First step: define environmental goods and services supplied to producers, consumers,… 4 Environmental goods and services can either be Directly supplied (depend on location): - air quality - landscape beauty Note. Lack of such services are unavoidable damages: - acid rain, contaminated soils Supplied through production activities: - productive eco-systems: agriculture, fishery - production inputs: agro-food industry, tourism Supplied through consumption activities: - food quality - recreational activities (natural parks, etc.) 5 Value types of environmental services: A/ Use values (related to economic activities, incurred damages) - direct use (consumption of a natural resource) - indirect use (environmental service, e.g., recreative fishing) B/ Nonuse values (passive values) - are not used but would be considered a loss if they disappeared - existence value (Bengali tiger) - legacy value (legacy to future generations) C/ Option value - for future use (consumer himself or future generations) - may be purely hypothetical (a new drug discovery from a remote environment) 6 TOTAL ECONOMIC VALUE (TEV) Use values Direct values (goods) Forestry firm, Agriculture, Fishery … Indirect values (services) Recreational activities, soil stabilisation… Non-use values Option values Value that may appear ultimately (pharmaceutical use,…) Existence value Knowing that the Pyrénées Brown Bear will survival (while never seeing him) Legacy value Knowing that «something» will remain available for future generations 7 3.1.1 Value of environmental goods for production activities Producer: maximise profit under several constraints - economic constraints (input and output prices) - technical constraints (technology) - environmental constraints (state of the environment) Principle of valuation: Environmental constraint is a constraint like others differences in environmental conditions indicate differences in profit value of an environmental good: measured by its effect on firm’s profit 8 Example : agrofood production unit involving water input, own private well (W) quality requirements for W other inputs (X): assumed fixed Quality of water input W is random Assume bad quality of W occurs with some positive probability π Possible substitute for W: Z, with non-random quality 9 Profit p Q W ( ) rWW ( ) if (1 ) p Q( Z ) rZ Z if ( ) Output price Technology Quality requirement Input prices Expected profit: E p Q( Z ) rZ Z (1 ) p Q W ( ) rWW ( ) Value of environmental condition: change in expected profit / change in proba. dE p Q Z Q W ( ) rZ Z rWW d 10 General framework: Technology F ( X , Z ) , where X : vector of production inputs Z : vector of environmental variables Comparative statics d dX 0 dZ Z X dZ dX / dZ Z X Important: a change in environmental conditions (quality of inputs, …) is affecting production conditions Change in production cost Change in output supply / output price ? Depending on market structure 11 For production activities, the value of environmental services can be inferred from (observed) production behaviour Changes in expenditure (production cost) are due to the need to substitute other inputs for changes in environmental conditions (quality) Hence, even if changes in environmental conditions are unobserved, the indirect value of environmental quality can be inferred because firm output is marketed Examples: - agricultural crop losses from ozone - change in production practices due to global warming 12 Initial state ( X 0 , Z0 ), final state ( X 1, Z1 ) Define profit i p Qi TC (Qi ) i 0,1 where Qi Q( X i , Zi ) and TC : Total Cost AC (Q ) TC (Q ) / Q TC (Q ) Marginal cost : MC (Q ) Q Average cost : max ( X , Z , p) X * X ( Z , p) X and Q* Q X * , Z Q Z , p * ( X * , Z , p) Assume perfectly competitive market: firms are price takers 13 Euros MC AC p AC q( p) Total profit (p > AC) Operational Profit (p > MC) q( p ) Average and marginal production costs Q 14 Euros MC( Z0 ) MC( Z1 ) AC( Z 0 ) p AC( Z1 ) AC (Q0 , p) Initial surplus AC(Q1, p) Change in surplus Q( Z 0 , p ) Impact of a change in Z Q( Z1, p) Q 15 3.1.2. Application: biodiversity, a useful input Broadly defined as total variability of life on earth Important for future industrial use (medicine, agrofood industry, etc.) But: - All species are not equally valued - A species is more valued when it is less substitutable - It is easier to promote conservation of a species if its expected value is higher How to build a decision rule for selecting species to conserve ? 16 Weitzman (1998): Consider the problem of ranking N programmes Each programme i, i=1, 2, …, N, is devoted to conservation of species i Let U i : utility for society of preserving i ; Di : diversity measure (distance with respect to other species) ; Ci : programme cost ; Pi : survival probability change due to programme Then the rank of programme i is: Ri U i Di Pi , i 1, 2, Ci ,N Empirical issue: estimation of components in formula above 17 3.1.3 Value of environmental goods for consumption activities Need to define equivalent of profit for consumer Program for a consumer: maximise utility under - economic constraints (price of goods, income) - environmental constraints Revelation of preferences: how to infer values that consumers set on environmental and natural resources ? Important: environmental goods (and services) are non-market goods No observable demand, no consumer surplus, no price 18 Case of use-values: relationship between non-market and market demands Relationship between market and non-market good Substitution Complementarity Neutrality Value of environmental good Demand for market good ↑ ↓ = Case of non-use values: direct approach for direct revelation Important: values can be defined for - amenities (positive effects) - damages (negative effects) 19 3.2 – Valuating amenities from natural resources and the environment 3.2.1. Theoretical framework u( x, q) : utility of household/individual x ( x1, , xm )' : vector of private goods q (q1, , qn )' : vector of public goods Distinction between private and public goods: the individual controls the quantities (x) vector q is exogenous Example: xi is quantity of tap water consumed qi is quality of the water Prices: vector p ( p1, , pm ) (market prices or not) 20 Individual is assumed to maximise utility subject to income y Indirect utility function V ( p, q, y ) given by V ( p, q, y ) max u( x, q) p x y x Minimum expenditure function m( p, q, u) is defined by m( p, q, u ) min p x u( x, q) u x Hicksian demand function : m( p, q, u ) xiu ( p, q, u ) (utility-constant demand) pi Marshallian demand function : V ( p, q, y ) / pi xi ( p, q, y ) (depends only on p and y ) V ( p, q, y ) / y 21 Assume u( x, q) is increasing and concave in q then m( p, q, u ) is decreasing and convex in q V ( p, q, y ) is increasing and concave in q Purpose: to measure the increment in income that makes the consumer indifferent to an exogenous change This change can be a - a price change - a quality change - a change in some public good For pure public goods (e.g., existence value), only indirect utility and expenditure functions are relevant 22 3.2.2 Willingness To Pay and Willingness To Accept Willingness to pay (WTP): the maximum amount of income the individual will pay in exchange for an improvement in circumstances Or The maximum amount he will pay to avoid a decline in circumstances Willingness to accept (WTA): the minimum amount of income the individual will accept in exchange for a decline in circumstances Or The minimum amount he will accept to forego an improvement in circumstances Equivalent definitions: compensating variation and equivalent variation 23 Relationship between WTP, WTA and variations Equivalent vs. compensating variations differ according to the comparison between initial vs. final well-being: Equivalent variation Utility increases Utility decreases WTA WTP Compensating variation WTP WTA Formal definition of WTP for a public good: amount of income that compensates or is equivalent to an increase in public good q V ( p, q* , y WTP) V ( p, q, y ) for q* q and V / qi 0. 24 Equivalently, WTP m( p, q, u ) m( p, q* , u ) when u V ( p, q, y ) and y m( p, q, u ) WTP: amount of income that leaves the individual indifferent between income y and public good q (initial state) and income y – WTP and public good q* (final state) WTP for a price change : m( p, q, u) m( p* , q, u) when u V ( p, q, y ) WTA: change in income that makes the individual indifferent between income y + WTA and public good q (initial state) and income y and public good q* (final state) WTA m( p, q, u* ) m( p, q* , u* ) when u* V ( p, q* , y ) 25 Also, WTA is defined by V ( p, q, y WTA) V ( p, q* , y) Important: WTP and WTA are useful measures for computing environmental values for amenities (positive effects) or negative effects on the environment (damage) 3.2.3 The Contingent Valuation Method (CVM) Very popular method for estimating values for non-market goods Produces its own data, is applicable to any situation (fictious markets) 26 Stages in a CVM exercise: a) Set up the hypothetical market for environmental service or good Inform respondents about the project: - reason for needed payment - bid vehicle (local tax, etc.) - who will pay ultimately - how environmental service will be restored/created b) Obtain bids (proposed values) Questionnaire, face-to-face interview, mailing, etc. Ask people for their WTP Different ways to obtain individual bids: - bidding game: higher and higher amounts suggested until maximum WTP is reached - closed-ended referendum: single payment suggested and response is YES/NO - Payment card: range of values is presented, one chosen - Open-ended question: « How much are you willing to… » 27 c) Estimate mean WTP (and/or WTA) - Average or median values computed from sample depending on choice to treat outliers - What to do with « protest bids » ? - What to do with « zero responses » in the case of open-ended questions ? d) Estimate bid curves Investigate the determinants of WTP/WTA Useful for aggregating results and predictions Estimating the relationship between WTP and individual characteristics e) Aggregate the data Convert bids or average bids to population total value figure Requires adequate definition of relevant population 28 3.2.4 The Hedonic Pricing Method Typically used on house price data Tries to find a relationship between level of environmental service and price of a marketed good (a house) Lancaster-Rosen approach: characterstics theory of value Any commodity can be described by a vector of characteristics, Z Let Bi ( Z ) : bid for an increase in characteristic i In market equilibrium, marginal bid Bi ( Z ) is equal to implicit price of Zi Zi (equal to marginal cost of Zi for consumer) 29 Hedonic equation for house h in neighbourhood i and environment k : Phik F S h , N i , Z k Environmental variables House characteristics Neighbourhood characteristics Implicit price for characteristic i : F Sh , N i , Z k Phik dZ k dZ k Rent differential: value of a marginal change in Z Consumer behaviour: equate marginal value for Z and its marginal cost 30 Rent differential Marginal value B Marginal value A Marginal cost QB QA Environmental service Individual equilibrium in housing market 31 Example: a CVM application for recreational services Site: South Platte River, Colorado, USA Survey: interview in person, N=95 Question: « If the South Platte River Restoration Fund was on the ballot in the next election, and it cost your household $__ each month in a higher water bill, would you vote in favor or against ? » Possible values: $ 1, 2, 3, 4, 8, 10, 12, 20, 30, 40 50, 100 32 Descriptive statistics Variable Description Mean (N=95) t Increment to water bill $ 14.78 HHINC Household income in 1997 $ 54,175 UNLIMWAT 1 if farmers entitled to unlimited water ? 0.45 ENVIRON 1 if member of conservation group 0.19 WATERBILL Average water bill $ 35.80 URBAN 1 if lives in large city 0.75 33 Specification of utility function: If choice=0 : V0 y 0 X 0 If choice=1 : V1 ( y t ) 1 X 1 Income Individual characteristics Random term 1 ( 0 ) : marginal effect of variable X when project is (not) implemented Individual prefers "Accept" (V1 ) to "Refuse" (V0 ) if utility is higher: V0 V1 y 0 X 0 ( y t ) 1 X 1 Prob[ACCEPT] = Prob[ V1 V0 ] Prob 0 1 ( 1 0 ) X t 34 Estimation of the model: 0 1UNLIMWAT 2 ENVIRON 3WATERBILL Prob yes F 4URBAN t Explanatory variables for choice: ( UNLIMWAT , ENVIRON , WATERBILL , URBAN , t ) Parameters to estimate: ( 0 , 1 , 2 , 3 , 4 , ) Individual indifferent between "Accept" (V1 ) and "Refuse" (V0 ) : V1 ( y,WTP, X ) V0 ( y,0, X ) y 0 X 0 ( y WTP) 1 X 1 WTP 1 1 1 0 X 1 0 35 Parameter estimates Parameter Estimate Std. error / Payment (increase to bill) 0.14 (0.03) 0 / Intercept 2.44 (1.48) 1 / UNLIMWAT -1.47 (0.74) 2 / ENVIRON 3.37 (1.18) WATERBILL -0.06 (0.03) URBAN 1.82 (0.71) 3 / 4 / Notes. Logistic distribution, with standard deviation σ. Standard errors of parameter estimates are in parentheses. 36 3.2.5 The Cost-Benefit Analysis (CBA) What is a Cost-Benefit Analysis: A tool for public policy assessment (for public policy-makers) Can also be used by a private decision-maker (a firm) Purpose: help in decision making when a (long-run) project is considered Especially used in the presence of risk or uncertainty Decide for or against a project by considering all possible outcomes Combination of scientific knowledge and society’s preferences over outcomes (in monetary units) 37 Example of needed components in the case of a project for reducing an environmental damage: - Probability of an environmental damage occuring - Nature and range of environmental damages - Cost of the public programme (e.g., for avoiding/restoring the environment, avoiding a risk) - Probability of success for the public programme Notes. - Some events can have negative effects for some agents (damages) and positive effects for others. - Somes outcomes can benefit the environment and not society, and vice versa 38 Basic steps 1- Choice of agents to include in the analysis (costs and benefits for whom ?) 2- Choice of a set of possible policy instruments/options 3- Inventory of all potential impacts of policy options and the associated indicators to measure them 4- Quantitative prediction of project’s impacts 5- Give an economic value to all impacts 6- Discount future costs and benefits 7- Sum up discounted values of costs and benefits 8- Conduct a sensitivity analysis (confidence intervals) of predictions above 9- Recommend the policy option with the largest net social gains 39 Important things to remember with CBA A/ General principles Rule: accept every decision that leads to benefits higher than cost. With CBA, a decision is always evaluated with respect to an alternative decision: It may status quo, or postponing the decision at a later time The alternative decision also has consequences, which need to be evaluated All costs and benefits are to be compared, which implies that they be converted to monetary units (in general) This implies that health and environmental considerations, but also mortality can receive monetary values 40 All assumptions and specifications must be justified, and the CBA must be evaluated first by (multi-disciplinary) experts The computation of costs and benefits for a given situation can depend on the objective (private or public decision maker) B/ The CBA and the citizen Question: is the CBA technocratic or democratic ? It is by construction citizen-oriented, because information on preferences are collected directly from citizens (or by observing their choices). Problem: what if citizens behave irrationally or citizen risk perceptions are too emotionally-driven ? 41 Benefits to a project are collected to evaluate society’s preferences corresponding to different outcomes by different methods: - Revealed Preferences (observing real-life choices) - Stated Preferences (CVM, etc.) C/ Main criticisms addressed to the CBA Ethical perspective: give a monetary value to some goods or components of life, culture, etc. But in practice, one does not evaluate the value of life (Value of Statistical Life), but the trade-off between income and a reduction of a mortality risk. 42 A fugure often quoted: The Value of a Statistical Life is about 5 million $ in OECD countries. But this means in reality that - both income and a reduction in mortality rate are valuable to people - The WTP for a reduction of 1 / 1million in mortality risk is 5$ What about differentiated treatment of individuals ? Possible discrepancy between efficiency and equity, a policy option could be preferred for reasons other than efficiency A CBA should detail policy impacts for all categories of individuals, if heterogeneous effects. Difficult to adequately represent society’s preferences in terms of social justice for example. 43 D/ The use of ACB in practice Mostly in the US, Great-Britain and some Scandinavian countries Almost no applications in France CBA is recommended by most international organisms (World Health Org., UN Environmental Programme, etc.) In the US: used for over 25 years in regulatory decisions on the environment, consumer and food safety, health and safety regulations, etc. Executive orders 12044, 12291 and 12866, Presidents Reagan 1981 and Clinton 1993) Either by law and/or for projects with expected impacts > 10 million $ 44 US federal administrations using recommendations based on CBA: USEPA (Environmental Protection Agency) USDEA (Drug Enforcement Agency, US Department of Justice) Differences between regulatory prevention levels in the US and Europe: Regulation is stronger (prevention level is higher) In the US: In Europe: -Alcohol - Tobacco - Pollution - Food - Energy - Transportation - Medicines - Work and building works 45 Carefulness when using CBA CBA has a normative feature: how to determine a socially efficient system for dealing with environmental protection, risk, etc. Different from the positive question: « How to organise the system such that economic agents make decisions that closely look like this efficient decision ?» CBA does not deal with positive aspects such as the relevant tax system to adopt, responsibility rules to establish, social and political acceptability or a policy decision, etc. « Couldn’t we decide for a less efficient policy option, but one that can more easily be implemented ? » Need for a unified framework (efficiency and implementation aspects). 46 The need for discounting values, and its consequences Policy option with cost M today, annual gains for society: g in d years from now. Net discounted benefit: use of a discount factor 1 (the value of 1 Euro next year compared to 1 Euro today) Value today of gain g in d years : d g , in d 1 years : d 1g , etc. Sum of discounted gains arising from period d : d DG ( g ) g g g (1 ) i d i 0 (because 1) g i d i 47 Comparison between DG d ( g ) and cost M : Project should be accepted if d (1 ) M M DG ( g ) g d Cost-benefit ratio Examples for selected values of and d 0.99 0.95 0.90 d=1 99 19 9 d=10 90.4 11.9 3.4 d=20 81.7 7.1 1.2 48 Example of a Cost-Benefit Analysis: Cardiff Bay Barrage 49 Background Estuarine area dividing South Wales from South-West England - One of the world’s greatest tidal range: up to 14 m. - Cardiff harbour inacessible at low tide for up to 14 hours a day. - Environmental services of the Bay: winter site for about 6000 wildfowl and waders, and resident birds (total 88,000) Project Development plan for a barrage across Cardiff Bay Conversion of the Bay from a tidal saltwater area to a freshwater lake (2 km2, 13 km. of waterfront) 50 Advantages: The project will eliminate the effect of the tide, hence: - new recreational developments (leisure boats) - development projects for Cardiff’s waterfront But there are downsides: - feeding grounds (inter-tidal mud flats) would be flooded. - loss of natural flushing process, hence accumulation of pollutants in the freshwater lagoon. Cost: around 220 million £ 51 MORGLAWDD Mae'r harbwr yng Nghaerdydd yn profi'r un o'r amrediadau llanw mwyaf yn y byd: hyd at 14m. Golyga hyn, pan fo'r llanw ar y trai, ei bod yn amhosibl cyrraedd ato am nyd at 14 awr o'r dydd. Bydd morglawdd yn cael gwared o effaith y llanw, a fu'n rhwystr i ddatblygaid, gan ymryddhau potensial adnodd mwyaf y brif ddinas ai glannau. 52 Before (low tide) After (any tide) 53 CBA conducted by the Cardiff Bay Development Corporation (CBDC) Three options: - status quo - barrage - mini-barrage (proposed by environmental groups) Notes. - The project would use public funds (UK taxpayers, not just local people) - benefits for whom ? If all UK is relevant population, housing and commercial projects are displaced investments from elsewhere. - New road link (project independent from barrage) Hence, different ways of presenting figures in the CBA proposed by the CBDC 54 First CBA: computed by CBDC - Discount rate: 8 percent per annum - benefits of new road are incorporated - no environmental damages included - benefits for Cardiff area only (housing and commercial development projects are not substitutes to others, i.e.,no displacement in development benefits) - rather high growth rates for property values This yields a NPV (Net Present Value) of 301 million £ for the barrage and -166 millions £ for the status quo. Second CBA: computed by accounting for environmentalist criticisms - benefits of new road are omitted - no environmental damages included (to simplify) - allowing for 50 % displacement in development benefits - assume lower growth rates for property values This yields an adjusted NPV 55 CBA of Cardiff Bay Barrage (in £ million) Alternative Project Options Barrage Mini-barrage No Barrage Barrage 121.55 28.38 0 Shadow project 4 4 0 Site preparation 147.25 90.29 86.36 Access costs 152.80 143.44 140.65 Landscaping 95.89 53.29 18.22 Others 25 25 25 Total cost 433 267 203 Land value 490 120 26 Property appreciation 244 62 11 Total benefits 734 182 37 NPV 301 -85 -166 NPV Adjusted -206 -139 -100 Costs Benefits 56 3.3 – A typology of pollutions and environmental damages Previous definition: An environmental damage can be considered a lost opportunity to supply (a reduction in) environmental service Pollution: caused by a human activity, reversible effect in general Damage: much more general, can be irreversible Pollution is often considered voluntary: a side-effect of an economic activity It can also be unvoluntary: industrial accident, etc. Important: a pollution is a necessary condition for a damage to occur NOT a sufficient condition 57 Why? 1,000 t Production Firm, plant 100 mg / liter 0.2 (20 %) Emissions Self-abatement physical potential Environment 80 mg / liter Damage It is damage, not pollution, that should be prevented or controlled 58 Relationship between pollution and damage: - self-abatement potential of the local environment - lag (period of time) between emissions and damage - Hence, difference between potential damage and actual pollution Examples of damages To human beings: health effects (cancer, various diseases) loss of environmental services (landscape, air and water colour, etc.) loss of natural species (plants, animals) To the environment: loss of biodiversity reproduction ability of natural species decrease in self-abatement capability 59 First distinction: point and nonpoint source pollution Point source pollution Industrial emissions are identified Nonpoint source pollution Agricultural emissions are not identified 60 In general, if there are multiple polluters (firms, farmers, etc.) and emissions are not measured, a point source becomes a nonpoint source pollution Some examples - Point source pollution Measured industrial Chemical Oxygen Demand (COD) Use of a single pesticide by a single farmer (Atrazine) Noise or smell of a single production plant - Nonpoint source pollution Motor vehicle emissions (Volatile Organic Compounds, nitrogen oxydes) Nitrate contamination of groundwater from agriculture Greenhouse gases (GHG) from coal-fired power plants 61 Important difference because: - Point source pollution can be traced to the firm, plant, production activity - Hence no problem in the proof of the damage (liability of producer) - A policy instrument can be used more efficiently, because pollution is observed for each producer On the other hand: - Nonpoint source pollution does not allow to identify individual polluters - Hence, problem of proof (may be a juridiciary issue) - If individual emissions are not observed, what policy instruments to use ? 62 4 . Environmental and economic policies - Applications to agriculture and agrofood chain 4.1 – The need for regulating pollution and water use We first start with the case of industrial water pollution: - One of the first application case of environmental policy instruments - Experience in developed countries over 40 years (France) - Regulation in developing countries has started to emerge 63 - Why quantify pollution ? To assess damage to society To make necessary corrections to pollution level, if needed - Why the need for evaluating the relationship between production and pollution ? To design adequate environmental policy for modifying producers’ behaviour Implicitly: there exists a socially optimal level of pollution Different from the optimal pollution level from producers’ point of view This implies that relationship between pollution and damage need be established (scientific evidence) 64 -What can public policy makers (government) do ? Find an efficient and feasible way of controlling pollution Available instruments: - Tax on emissions - Ban or quota on some production inputs - Subsidy for abatement activity - Subsidy for investment in clean technology - Set up a market for pollution permits - Contract with firms 65 4.2 – Welfare and abatement cost, a production-side approach Consider first a social planner maximising social welfare W W pq c(q, a) De(q, a), Firm’s profit Damage where q: output supply c: production cost a: abatement level First-order conditions p: unit output price e: emission level D: damage function W c( q, a ) dD e p 0, q q de q W c( q, a ) dD e 0 a a de a 66 p c( q, a ) dD e q de q (damage should be added to conventional cost) c( q, a ) dD e a de a (rule for optimal abatement level) Marginal damage + prod. cost Marginal damage Production cost p Private optimum q q* q0 67 Solution: optimal levels of output and abatement (q*,a*) from a social point of view Socially optimal emission level is e(q*,a*) Since D increasing in e, and e increasing in q : q * q0 Interpretation: - producer should internalise damage - abatement activity should be such that marginal abatement cost = marginal gain of damage reduction due to abatement 68 Consider then a firm faced with a tax on emissions, T max Profit : pq c(q, a) T e(q, a) c e p T q q Necessary conditions c T e a a Hence, the condition for (social) optimality of solutions is that T D D e( q, a ) e Pigovian tax (unit tax on emissions = marginal damage) 69 Implementation in practice: This means the following items are required: - Knowledge of functions D(.) and e(q,a) - Observability of emission level e and abatement a → Point source pollution framework Extension of the framework to an actual population of N firms : - This means a polluter-specific tax level, Ti , i=1,2,..,N - Is it feasible (legally, etc.) ? - Will it be acceptable to firms ? Note: The Pigovian tax is an optimal tax It is a special case of the ‘‘Polluter-Pays Principle’’ 70 Numerical example Single firm with the following cost function and emission function c(q, a) A q a e(q, a) B (q a) , aq A, , 0 Cost is increasing in output and in abatement Cost is convex in output and in abatement , 1 Firm program is max p q Aq a T B( q a ) System of equations to be solved: p A q 1a TB 0, 1 A q a TB 0 71 1 p A q a TB 1 A q a TB 1/ 1 1 q TB A a p TB A q 1a a 1/ TB A a (1 ) / 1/ p TB 1 q A 1 p TB TB 1 1 a A A p TB q A 1 1 1 TB A 72 c(q, a) Aq2 Caq Simpler specification: Firm program becomes A 2 a2 max p q q Caq T B q 2 2 p Aq TB aC 0 Cq TB a 0 a q C p TB , 2 ATB C TB p TB ATB C 2 73 Other possible instruments to control for industrial water pollution (than an emission tax): - investment subsidy in ‘‘clean technologies’’ - investment subsidy and technical assistance in abatement activity - a direct tax on production inputs or on output - a direct ban on some emissions Difference here between abatement technologies: - ‘‘end-of-pipe abatement’’ (production unaffected) - clean technology (modifies production process) Direct tax on production inputs or on output: - Used when emissions costly to monitor or to observe accurately - Can be inaccurate or unfair (difference between actual and estimated pollution) 74 Ban on some emissions: - Rarely used - Replaced in practice by emission standard (maximum concentration level) In some cases (France), combination of policy instruments: 1/ Firm’s establishment is allowed by public authority 2/ Environmental emission standards are imposed 3/ Tax on effluent emissions 4/ Subsidy policy of abatement activity This means that - Firms with too toxic pollutants are not allowed to produce - Compliance with emission standards implies that firms may need to limit production - Firms will have a strategy on abatement activity as well 75 4.3 The French water policy and agrofood industrial effluent emissions French water policy: dates back from the 1960s Important dates: 1964: first French Water Act, creation of the 6 Water Agencies 1966: first emission tax systems implemented early 1990s: significant increases in emission taxe levels 1992: second French Water Act 2000: European Water framework Directive A major actor in the French water policy: The Water Agencies - One for each of the 6 main river basins - Hydrological (not administrative) boundaries for Water Agency action 76 Water Agencies: Autonomous environmental authorities, with administrative supervision of the Ministry of the Environment Goal: financial participation to water disposal and pollution reduction operations Agencies also participate to common-interest operations: dams, water transfers, groundwater recharge, limitation of coastal water pollution Financial instruments: emission tax, subsidies, loans with/without interest 5-year working plans (…, 1992-1996, 1997-2001, 2002-2006) Within each 5-year working plan, budget must be balanced 77 The 6 Water Agencies are: - Adour-Garonne (Southwest, 115,000 km2) - Artois-Picardie (Northeast, 19,562 km2) - Loire-Bretagne (Brittany and Central France, 155,000 km2) - Rhin-Meuse (East, 31,500 km2) - Rhône-Méditerranée-Corse (Southeast and Corsica, 130,000 km2) - Seine-Normandie (North and Paris area, 100,000 km2) Note: no Water Agencies for overseas territories (French West Indies, South Pacific, etc. A dual charge scheme: - On water use - On effluent emissions For 3 categories of users: industry, residential users, agriculture 78 Revenues from Water Charges Collected by Water Agencies, VII Working Plan 1997 – 2001 (in million French Francs) Residential Industry Agriculture Total Water pollution charge Use charge Total User Share 35,614 6,361 41,975 83.7% 5,437 1,910 7,347 14.7% 554 269 823 1.6% 41,605 8,540 50,145 100% 79 Subsidies by Type of Operation (in million French Francs) VI Working Plan % of total subsidies VII Working Plan % of total subsidies POLLUTION Treatment plants in communities Sewage network Industrial pollution control Waste disposal Technical Assistance Water treatment premium Operational costs subsidy Agricultural pollution control Others 10,864 11,392 5,949 1,159 370 4,730 614 550 42 25 27 14 3 1 11 1 1 0 12,915 13,424 6,048 1,178 631 7,980 2,189 2,682 169 23 24 11 2 1 14 4 5 0 19 18 2 2 71 69 257 388 302 Total 35,652 83 47,216 83 32 RESOURCE AVAILABILITY Waterworks Irrigation Groundwater River basin recovery Drinkable water Resource management 815 161 726 711 4,469 393 2 0 2 2 10 1 1,114 25 643 1,548 5,520 892 2 0 1 3 10 2 37 -84 -11 118 24 127 Total 7,275 17 9,742 17 34 42,927 100 56,958 100 33 Grand total Percent change 80 Mission: financial participation to investment in public (common interest) or private equipments and facilities, for emission control and improvement of resource sharing. No direct initiative on private investments, but financial aid is crucial Necessary funds: taxes collected from water users in river basin: - Emission tax (water pollution) - Water extraction and consumption taxes. Funds are then redistributed in the form of direct subsidies or loans Incentive role in reducing fixed costs and later, emission charges. 81 The Water Agency tax scheme Multi-year framework of the Working Plan: Tax receipts must balance expenditures → Consequence: total amount of tax receipts determined according to expected expenses The category of users to be taxed and the unit tax rates must be approved by the Water Agency Executive Board Unit rates can be modulated geographically (coastal zones, wetlands, vulnerable areas) Taxes are collected from each individual plant, with a minimum perception threshold 82 Two types of emission tax schemes: based on actual versus estimated emissions Actual emissions: daily measured emissions (large plants) or average emission rate defined as: “daily average emission level of month with highest activity Estimated emissions: from yearly firm’s activity report by the manager An input-output table production - emissions is used, based on average emission rates of industries. Emissions are defined as a number of units per day (kg/day), not as a concentration (kg/day/litre). 83 Tax is then computed by applying a unit emission tax rate on a list of pollutants: - Biological Oxygen Demand (BOD), - Suspended Solids (SS), - Nitrogen (N), - Phosphorus (P), - Inhibitory Matters (IM) If firm claims to be over-taxed or Water Agency believes reported or estimated emissions are below actual ones, plant inspection may be required Industrial plants equipped with an abatement plant: Emission charge is reduced in proportion of reduced (avoided) pollution Abatement rate: as above, either measured or estimated 84 Example of input-output table (Production - Emissions) Product Unit SS (gr.) BOD (gr.) IM (Equitox) N (gr.) P (gr.) Beer Litre 400 170 - 20 5 Wine 100 Litres 5 30 - 1 0.1 Refined Sugar Kg 1.5 3.2 - 0.25 0.01 Emmental cheese Litre 0.5 2.4 - 0.2 0.1 Kraft paper Kg 10 40 0.21 0.4 0.17 Viscose Kg 28 35 2.5 0.8 - Fur Skin 270 360 3 20 2.5 Steel Ton 420 260 - - - Coke Ton 200 2000 30 1100 1 Printed Circuit Board Ton of copper - - 18,000 - - 85 Effluent emission and use charges, VI Working Plan Water Agency Suspended Solids BOD Nitrogen Phosphorus Water use Adour-Garonne 158.30 254.96 226.27 106.76 [0.12 ; 0.18] Artois-Picardie 126.00 252.00 143.00 675.00 [0.10 ; 0.31] Loire-Bretagne 92.11 141.70 173.00 272.54 [0.16 ; 0.36] Rhin-Meuse 103.19 206.37 141,59 235.53 [0.15 ; 0.30] Rhône-Méd.-Corse 80.00 240.00 120 300.00 [0.05 ; 0.30] Seine-Normandie 113.93 249.69 213.69 NA [0.09 ; 0.26] In French Francs per kilo-day for Suspended Solids, BOD, Nitrogen and Phosphorus, in French Francs per cubic meter for water use. 86 In parallel with the action of Water Agencies: The DRIRE (Direction Régionale de l'Industrie, la Recherche et la Technologie) - Designs emission standards for industrial plants, in terms of maximum concentration of effluent emissions, by type of pollutant (March 3, 1993 decree) - Delivers emission (in general once-and-for-all) permits to industrialists (« sites classés »). Emission standards are in practice modulated depending on localization. Firms’ compliance with standards can be controlled (« Water Police ») If an industrialist does not comply with a standard, the DRIRE imposes a 3-year rehabilitation plan (« mise en conformité »). Since 1992, plants subject to emission permits must be equiped with permanent measurement devices. 87 Economic Analysis of Water Agency regulation Ideal ( ?) domain for application of environmental regulation theory: - point source pollution - economic instruments : « market-based » and « non-market-based » asymmetric information between Water Agency and the industrial firm (abatement effort, technology, abatement cost,...) Problems: - are economic instruments used by Water Agencies compatible with regulatory instruments described by the theory? - are those instruments adequately chosen and are not redundant? - how to evaluate damages due to emissions? 88 Instruments used by Water Agencies: Basic instrument: emission tax Pigovian Tax if equal to consumer marginal damage from pollution Problems in practice when considering a Pigovian tax: - Necessary to know precisely the social damage function, to compute marginal damage and use it in designing the optimal tax rate - Necessary to know the social damage due to pollution, for each geographical unit - Uniform versus personalized tax? - Consistency with government anti-inflation (or employment) policies ? 89 Other (complementary) economic instrument: contracts (abatement subsidy, between Water Agency and the firm) Justification of contract-based policy by an imperfect pollution tax system? Type of contracts (specifying capital stock of abatement) motivated by simplicity and low control cost? Asymmetric information on: - Technology - Abatement effort - Future activity Strategic behaviour, e.g., if inverse relationship between gross pollution level and abatement rate. Firms can ask for large capital stock of abatement, claiming future activity (output) will increase 90 Incentive effect of emission tax Does the level of the unit emission tax modify the behaviour of the polluting firm ? Emission tax can have an impact on - The production level (specially in case of no abatement) - The net emission level(after abatement), given level of gross emission - The abatement rate, given level of gross emission. Let B : gross emission level (before abatement) N : net emission level (after abatement) : abatement rate, : unit emission tax = BN B 91 How to construct a simple model for abatement rate ? Assume abatement cost is c( B, ) A B Firm's profit is pq C ( q) N c( B, ) Because N B(1 ), pq C (q) B(1 ) c( B, ) pq C (q) B B c( B, ) Assumption here: production cost is separable from abatement cost Hence, strategy of the firm in two steps: 1/ Decide on optimal production level, q 2/ Given q (and B), decide on optimal level of δ 92 c( B, ) 0 B A B 1 0 max B 1/( 1) B B A 1 log log B log( A ) log( B ) 1 1 log log( ) log( A ) (1 )log( B) 1 If abatement cost is convex in abatement rate δ, β>1 and abatement rate is increasing in tax rate If abatement cost is convex in gross emission B, α>1 and abatement rate is decreasing in gross emission level (provided β>1 ) 93 Estimated abatement rate equations log( ) a b log( B ) c log( ) with a log( A ) 1 1 , b , c 1 1 1 c 1 b c a , 1 , and A exp c c c 1 c Nitrogen log() = - 0.0269 log (B) + 0.0896 log () Suspended Solids log() = 0.0630 log (B) + 0.2134 log () DBO log() = 0.1443 log (B) + 0.1179 log () Data source: French agrofood industries, 1992-1998, all Water Agencies 94 Another application: 320 French plants in the Adour-Garonne and Seine-Normandie river basins Variable Mean Std. Deviation Minimum Maximum B 3278.1 9962.1 4.00 112286 δ 0.5793 0.3023 0.0024 0.9960 τ 225.4 63.2 91.0097 561.06 Source: Lavergne and Thomas, J. Empirical Econ., 2005 B : BOD (Biological Oxygen Demand) emission level, in kg. / day δ : BOD abatement rate (in percent) τ : BOD emission tax (in French Francs) 95 Estimated equation log( ) 0.0143 log( B ) 0.5699 log( ) + 0.0933 Food and drinks + 0.1634 Dairy and milk products + 0.0233 Chemicals - 0.4629 Iron and steel - 0.6553 Paper and wood + 0.0422 Textile 0.9750 and 2.7547 Less efficient industries: ‘‘iron and steel’’ and ‘‘paper and wood’’ Most efficient industries: ‘‘Dairy and milk products’’ and ‘‘food and drinks’’ 96 4.4 An example: the Brazilian water policy Federal Water law: January 1997 River basin chosen as basic administrative unit: decentralisation principle following the French experience Brazil is a federal state, each state designs its own water policy, in compliance with the 1997 federal law Pioneer implementation of the new policy framework: in the Paraíba do Sul river basin Southeast region of Brazil, across states of Minas Gerais (20,700 km2), Rio de Janeiro (20,900 km2) and São Paulo (13,900 km2) 5 million inhabitants, 8 500 industrial plants, and 10 percent of country’s GDP 97 Main problem in river basin: water pollution due to industrial and domestic effluents Rapid demographic growth of basin’s urban areas not accompanied by adequate planning and sanitation measures Lack of sanitation infrastructure, indiscriminate occupation of riverbanks About 69 percent of households connected to municipal sewage network but only 12 percent of collected domestic wastewater treated before release in water bodies Estimated domestic BOD discharge in river basin: 240 tons / day Estimated industrial BOD ’’ ’’ ’’ ’’ : 40 tons / day 98 1996-1997: 2000 : 2002 : Creation of the Paraiba do Sul River Basin Committee (CEIVAP) Negotiations about water charge methodology, according to participation principle Creation of the river basin Water Agency The following principles were adopted during negotiation about water charges: - Simplicity (conceptual and operational): water charges based on directly measurable parameters, for clear understanding by users - Acceptability by all users, facilitated by participatory approach in the CEIVAP - Signaling: water charges are expected to act as signals about economic value of water resources, and importance of sustainable use - Minimisation of economic impacts, in terms of cost increases 99 Therefore, tradeoff between incentive nature of water charge and economic impacts (signaling vs. acceptability) Hence, charges are set at very low levels during initial implementation period (2003-2006). Industry and residential users: Water withdrawal charge: R$ 0.008 / m3 Water net consumption charge: R$ 0.02 / m3 Effluent emission charge: up to R$ 0.02 / m3 Agriculture: Water withdrawal charge: R$ 0.0002 / m3 Total charges defined to be < 0.5 percent of rice and sugar production production costs Note: 1 R$ (Real) is about 0.38 Euros 100 How reactive is industrial water demand to water price ? Industry Water demand elasticity Food and beverage -0,82 Clothing -0,31 Wood, rubber and plastics -0,40 Pulp and paper -0,76 Chemicals -0,71 Non-metal minerals -0,22 Iron and steel -0,48 Mechanical industry -0,31 Transport equipment -0,51 Others -0,33 101 Simulation of the impact of water charge changes ΔPW = 10 % ΔPW = 20 % ΔPW = 30 % ΔPW = 40 % ΔPW = 50 % ΔXW - 3,23 % - 6, 38 % - 9,40 % -12, 28 % -14,99 % ΔC 0,05 % 0,11 % 0,16 % 0,21 % 0,26 % ΔPW : percent change in water charge ΔXW : percent change in water demand ΔC : Percent change in production cost 102 Simulation of the impact of changes in water charge (ΔPW) and production levels (ΔY) ΔY 0% 5% 10 % 15 % 20 % ΔPW 0% - ΔW= 3.39 % ΔW= 6.66 % ΔW=9.81 % ΔW=12.86 % 10 % ΔW= -3.23 % ΔW= -0.12 % ΔW= 2.86 % ΔW=5.74 % ΔW=8.53 % 20 % ΔW= -6.38 % ΔW= -3.52 % ΔW= -0.77 % ΔW=1.89 % ΔW=4.46 % 30 % ΔW= -9.40 % ΔW= -6.75 % ΔW= -4.20 % ΔW=-1.73 % ΔW=0.65 % 40 % ΔW= -12.28 % ΔW= -9.80 % ΔW= -7.42 % ΔW=-5.12 % ΔW=-2.89 % 50 % ΔW= -14.99 % ΔW= -12.68 % ΔW= -10.44 % ΔW=-8.28 % ΔW=-6.19 % 103 4.4 Regulating irrigation and emissions from agriculture Some basic figures on water use in Europe Water Exploitation Index (WEI): average water extraction / average water resources Water stress if WEI > 20% WEI for Europe : 353 km3/year / 3500 km3/an (10%) Selected figures by country Ireland France Germany Portugal Belgium Spain 2% 8% 10 % 15 % 20 % 32 % (18 % including energy sector (25 % (17 % (45 % (36 % ) ) ) ) ) 104 Water use by major European zone (Eurostat, 2003) 70 60 50 Energy Industry Agriculture 40 30 20 10 ue st -O Eu ro pe C en tre lE ur op e t C en tra hw es N ot So ut hw es t 0 105 ► Other key figures, for France Average precipitation: + 440 billion m3/year - Evaporation : 270 billion m3/year - Outflow in rivers and streams : 170 billion m3/year =0 Water withdrawal and use, mainland France (billion m3) 25 20 15 Withdrawals Net consumption 10 5 0 Energy Drinking water Irrigation Industry 106 4.4.1. Water for irrigation Worldwide: 18 % of arable (cultivated) land is irrigated (267 million hectare, World Bank, 2001) but contribute for 40 % of total agricultural production In France: about 1.6 million ha irrigated in 2000 (out of 2.6 potential irrigated) 50 % for maize (corn, grain and seeds) 18 % for horticulture, vineyards, fruit trees 10 % for oilseed. Between 1988 and 2000: 50 % of the increase in irrigated land has been due to maize only 107 Regional statistics for irrigation, 2002 Region Irrigation (million m3) Irrigated land (1000 ha) Share of Share of maize in horticulture, irrigated vineyards, land (%) fruit trees in irrigated land (%) Poitou-Charentes 234.66 169.02 79 3 PACA 616.86 114.95 6 33 Aquitaine 408.96 278.69 74 17 Midi-Pyrénées 361.96 269.26 70 8 LanguedocRoussillon 238.76 64.76 8 44 Source : French Agricultural Census, 2000. 108 Water withdrawal for irrigation in France: 5.6 billion m3 each year (12 percent of total), of which 88 percent from surface water Net consumption: 43 percent of the total Irrigated areas have increased threefold from 1970 and 1995 (1.6 million hectare out of total agricultural land of 30 million hectare). Input-Output process in the water cycle: In Rainfall Run-off (lessivage) Infiltration Leaching (percolation) Out Pumping Evaporation Transpiration Output to surface waters 109 Problem 1: Over-use of surface water for irrigation - Minimum river flow for survival of downstream species not guaranteed - Biodiversity and economic losses - Increase in pollutant concentration Problem 2: Over-use of ground water - Increased cost of pumping - Subsidence (affaissement de terrain) - Decrease in surface water flow, and lake water level - Decrease in groundwater recharge potential 110 Technical Solutions 1/ Management of Available Volumes - Desalinization (costly, energy-intensive) - Dams and reservoirs (technical constraints due to evaporation, difficulty to find new sites) - Re-cycling : Drinking-direct: « toilet-to-tap » ; Non drinking- direct: Parallel network of wastewater ; Drinking and non-drinking-indirect: groundwater recharge by injection. 2/ More efficient irrigation Sprinkler and low-flow rather than gravitation or flooding. 3/ Water-saving seeds Agronomic research 111 Economic solutions Irrigation water pricing ► Demand for irrigation water Consider n producers, each growing m crops For each crop, a production function associating water input to crop yield Let q j : water input for crop j ; w : water price per m 3 ; p j : output price of crop j Production function of crop j : Profit of producer i, i 1,2, f j (q j ) m , n : i p j f j ( q j ) wq j , j 1 112 Maximisation of profit with respect to qj : pj f j (q j ) q j p j f j q j ( w) w w 1 qj f j , p j j 1,2, , m. Inverse of derivative of production function Water demand from producer i (across all crops) : w qi ( w) f ij , i 1,2, pj j 1 m 1 , n, n Total water demand from all producers : q( w) qi ( w). i 1 113 Demand-side management of irrigation: through water pricing → Performance of pricing policy depends on water demand elasticity Elasticity of water demand with respect to price: qi ( w) w log qi ( w) w qi ( w) log w Efficient water pricing: maximisation of total surplus (farmers plus water producers) For a water price w : Users (farmers) : Demand q( w) such that f q w p, Surplus is pf q( w) wq( w) 114 Water supplier : Operation profit is : wq(w) VC q(w) where VC (.) : Variable Cost of producing water Total profit of water supplier : wq( w) TC q( w) TC : Total Cost = VC FC Fixed Cost Operation worthwhile in the short run if operation profit > 0 But fixed costs have to be covered in the longer run Total Surplus is : V ( w) V q w pf q w wq( w) wq( w) VC q w pf q w VC q w 115 Maximise surplus with respect to water price w dV ( w) dq 0 pf q( w) MC q( w) 0 dw dw MC q( w) pf q( w) ( w) w* MC q( w* ) ► Only efficient pricing: MC pricing Average Cost (AC) pricing : inefficient, - It increases producer’s surplus, but decreases farmers surplus - Fixed production costs can be covered by AC pricing 116 Marginal or Average Cost pricing MC Euros/m3 AC A w AC B C w MC D E Derived Demand q(wAC ) q(wMC ) m3 Total Surplus under MC pricing : A + B + C + D + E Total Surplus under AC pricing : A + B + D 117 Available pricing methods - Volumetric : direct measure (water meter) - Input/output : water paid in proportion to production or input (tax) - Area : payment according to irrigated area - Block pricing : volumetric method with consumption thresholds - Two-part tariff : fixed charge + constant marginal price - Formal or informal water markets… - NB 1 : Two-part tariff is often used when MC < AC - NB 2 : Area payment may depend on irrigation method, season, etc. and sometimes also on non-irrigated area (if important investments) 118 Why is (efficient) MC pricing not more widely used in practice? ► Implementation costs (metering, etc.) Evidence by Bos and Wolters (1990 ) : out of 12.2 million irrigated hectares in the world - 60 % concerned by area pricing - 25 % concerned by volumetric method Tsur and Dinar (1997) : area pricing can be preferable if one integrates implementation costs ► Tariff proportional to output / input : Imperfect information on production technology ► The method to choose depends mostly on local implementation costs (regional heterogeneity) 119 Comparison of the different pricing methods Tariff Implementation Potential efficiency Efficiency horizon Demand control Volumetric (uniform rate) Complicated First-best Short run Easy Output/Input Less complicated Second-best Short run Fairly easy Area Easy None - Through crop restrictions Two-part Fairly complicated First-best Long run Fairly easy Water markets Difficult First-best Short and long run Depends on market’s type 120 To conclude on irrigation: water price should act as a signal on resource’s value Efficiency principle : water should be paid at a price equal to marginal cost of provision Efficient pricing : - A fixed fee for covering indirect costs (not related to consumed volumes) - A volumetric price allowing to cover operation costs (Increasing) Block pricing : Users with higher consumption (revenue ?) pay more in proportion (per cubic meter) Problem of observing consumption : all users should be paying for the volumes actually consumed 121 4.4.2. Nitrogen and other inputs Fertilizer used in agriculture: - Chemical (industrial) and Organic (animal) sources - Chemical fertilizer: mostly a combination of Nitrogen (N), Phosphorus (P) and Potash (K). France: 2nd world user of fertilizer (3.6 million ton nitrogen in 1995, 37 % of animal origin) 63 percent of mainland in excess nitrogen areas (more than 170 kg N/ha) Agriculture: Main nitrogen (65 %) and phosphorus (20 %) emission source Intensive cattling (élevage): 50 % of hog and poultry production, and 40 % of beef production concentrated on 6 - 8 % of territory 122 Pesticide: France 3rd world user (95 000 tons) Nitrogen loss due to leaching and/or run-off: 25 percent (6.10 – 12.20 Euros / hectare) Problem 3: Impact on the environment and health risk Nitrates in rain and irrigation water carried into surface water (run-off) and groundwater (leaching): - Eutrophisation of surface water (proliferation of algae, reduction of oxygen contained in water) - Human health: nitrates convert into carcinogenic nitrosamines. Reduction of blood-carying capacity by haemoglobin. 123 Other inputs: - Accumulation of heavy metals from animal feed - Pesticides in food and water: allergic reactions, may affect nervous system, kidney and liver functions - Antibiotic residues Technical solutions - Better management of manure stocking and spreading - Use intermediary crops to trap nitrogen (legumes) - Better production risk management (hedging behaviour and self-insurance against crop yield uncertainty). 124 125