Donatella Porrini
dporrini@liuc.it
DIFFERENT ENVIRONMENTAL POLICIES
IMPOSED TO THE FIRMS
16th, 17th February, 2015
LIUC COURSE:
CORPORATE CITIZENSHIP FOR GLOBAL FIRM
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Introduction
❧ The traditional Economic Analysis of Law (EAL)
approach about the comparison between different
environmental policies is based on the assumption
of rational economic agents.
It is based on the use of mathematical models.
❧ The Behavioural Economic Analysis of Law
(BEAL) approach is based on a sort of “irrational”
behaviour that comes more from emotions.
It is based on the used of experiments.
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The EAL Approach
❧ Public intervention is justified on the base of
market failures because of two reasons:
1) the environment appears as a “public good” that
may not be appropriated and has no market price;
2) the damage to the environment is a case of
“externality”: it is fully or partly a social cost that
is not going to be internalized by the parties
causing it.
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CHOOSING BETWEEN
DIFFERENT ENVIRONMENTAL
POLICY INSTRUMENTS
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COMPARISON BETWEEN
"PUBLIC-ORIENTED" AND "MARKET ORIENTED”
INSTRUMENTS:
● the first kind of instruments are characterized by a
public agency with a public definition of conduct rules
and a public enforcement system;
● the second are based on market mechanism stimulating
indirectly the conduct of the firm and characterized by
a private administration and a private enforcement
system.
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First instruments: COMMAND-and-CONTROL
(CAC)
Public-oriented instruments, which require the use of a
particular technology or the observation of a
performance standards, prescribing the maximum
amount of pollution that a source can emit.
● With perfect information, the centralized agency can
systematically assess environmental risks in an
optimal way.
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Command-and-control policies
❧ Command-and-control (CAC) policies are the
most common system of regulation applied in the
environmental sector in both the advanced and
developing countries
❧ As the name implies, the CAC approach consists
of a 'command', which sets a standard, based on
the maximum level of permissible pollution, and a
'control', which monitors and enforces the
standard.
❧ In the US experience, the EPA provides a clear
example of regulation by an independent
environmental authority.
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Different command-and-control policies
In general, there are two types of standards:
1 Ambient standards set the minimum desired level of
air or water quality, or the maximum level of a
pollutant, that must be maintained.
2. On the other hand, an emissions standard specifies
the maximum level of permitted emissions, that can be
on two types:
2.1 Performance-based standards are the most common
type. They stipulate emissions limits that each firm is
allowed.
2.2 Technology-based standards not only specify
emissions limits, but also the "best" technology that
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must be used
ADVANTAGES
❧ The advantage of centralised agencies is to assure
high level of research in terms of measurement of
costs and benefits of the different technical
preventive instruments.
❧ Well-defined standards generate the correct
incentive for the firm to act with caution and make
the best production and prevention decisions
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DISADVANTAGES
❧ The disadvantage of centralised agencies is to not
be able to immediately follow the technological
changes of the different industrial sectors.
❧ A big centralised agency can easily be subject to
the political influence and to the lobbies pressure
(capture)
❧ Firms have no incentives to reduce pollution
beyond the standard.
❧ Penalties for violating standards tend to be too low
and enforcement tends to be weak.
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THE CHOICE BETWEEN
DIFFERENT POLICIES
INSTRUMENTS: COMMANDand-CONTROL
VS MARKET-BASED
REGULATION
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Second instruments: MARKET-BASED
(MBI or EI - Economic Incentives)
Market-based instruments as regulatory devices
that shape behavior through price signals rather than
explicit instructions.
● With a perfect implementation the improvement to
environmental quality is obtained at the lowest
possible cost.
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DIFFERENT TYPES OF MBIs
•  Charges or a tax is a fee that is imposed on a pollutant
in proportion to the amount of the pollutant released
into the environment.
•  Charges may be classified in the following categories:
1.  Emission (or effluent) charges is based on the actual amount of
the pollutant discharged.
2.  Product charges or levies is a mark-up on the price of a
pollution-generating product that is based on the amount
responsible for pollution.
3.  User charges is a fee levied on the user of an environmental
resource based on the costs of treating emissions (or effluents)
that affect the resource.
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ADVANTAGES OF CHARGES
•  Charges give consumers and firms an economic
incentive to reduce pollution.
•  Unlike standards, which are applied uniformly to all
polluters, charges enable firms to adopt a cost-effective
solution to pollution abatement.
•  Compared to standards, there is a stronger incentive for
firms to adopt new technology in order to lower the
charges they have to pay.
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DISADVANTAGES OF CHARGES
•  An 'optimum' tax is often difficult to set for certain
non-market environmental commodities.
•  Firms could pass on a portion of the tax or charge to
consumers in the form of higher product prices.
•  Costs of monitoring the compliance may be high if
charges are based on the emission.
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DIFFERENT TYPES OF MBIs
•  A subsidy is a payment or tax concession that assists
firms to reduce pollution. In that sense a subsidy is the
opposite of taxes.
•  The subsidy could be offered in proportion to the per
unit reduction in pollution, or it could be offered for the
purchase of pollution abatement equipment or
technology.
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COMPARISON OF CHARGES AND SUBSIDIES
•  In theory, both taxes and subsidies should result in the
same optimum level of environmental quality.
However, there could be the following differences:
•  where there is unrestricted entry into the industry,
subsidies could attract more firms and therefore
aggregate pollution could increase in the long-run
•  subsidising polluters may be seen as socially unjust
because some may see this as taking income away from
the society
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DIFFERENT TYPES OF MBIs
•  A relatively new addition to MBIs is the marketable (or
tradeable) permit system which originated from the U.S.
•  Under this system, the government issues a fixed number
of permits or "rights to pollute" equal to the permissible
total emissions and distributes them among polluting
firms in a given area.
•  A market for permits is established and permits are traded
among firms.
•  Firms that maintain their emission levels below their
allotted level can sell or lease their surplus allotments to
other firms or use them to offset emissions in other parts
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of their own facilities.
INDIVIDUAL TRANSFERABLE QUOTAS
•  The concept of marketable permits may be used to
manage natural resources such as fisheries.
•  This system is referred to as Individual Transferable
Quotas (ITQs).
•  Under this system, property rights to a specified
quantity of fish harvest are distributed among firms or
auctioned off to the highest bidders.
•  The holders of ITQs may use, sell or lease them to
other firms.
•  Over time, the ITQ systems leads to an efficient use of
effort and harvest.
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ADVANTAGES OF PERMITS
•  Allocation of permits is determined by market
forces.
•  The ability to sell permits is an incentive for firms.
•  The system makes allowance for industrial
development.
•  The system can generate income for the
government.
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DISADVANTAGES OF PERMITS
•
The market for permits may not be perfectly
competitive.
•
Well-develped markets may constraint the
permits' system.
•
Administrative, monitoring and enforcement
costs may be high.
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THE CHOICE BETWEEN
TAXES
VS TRADEABLE PERMITS
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First instrument: TAXES
A tax is a way to attribute a price to emissions that may be incorporated by the
firm in the price of its products.
●  The incentive for the adoption of abatement techniques relies on the market
mechanism because a firm that does not apply the optimal techniques, will
produce more emissions, pay more taxes and sell its products at a higher price
than its competitors.
Second instrument: TRADEABLE PERMITS
Tradeable Permits are instruments that shape behavior through price signals rather
than explicit instructions on emission control levels or methods.
●  They can encourage firms to undertake actions that serve both their own financial
interest and public policy goals.
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COMPARISON BETWEEN THE TWO INSTRUMENTS
Both the instruments require to determine the quantity of polluting emissions.
This implies regulatory tools to design a specific environmental target, a
monitor procedure, and the distribution of the costs to the firms through a
tax or through permits based on their polluting emissions.
First instrument: TAXES
Informational issues connected with the taxation system in implementing an
optimal tax on a distributional point of view. Plus evasion problems.
Second instrument: TRADEABLE PERMITS
Informational issues connnected with the implementation of an optimal system of
allocation of permits (theory of auction)
.
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REFERENCE:
http://www.rff.org/rff/Documents/
RFF_Resources_152_ecoincentives.pdf
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