India to apply Dr. Interis’ teachings

From CNN Money: India Slaps New Taxes on Cars to Curb Pollution

The tax hikes were unveiled as part of India’s annual budget on Monday by Finance Minister Arun Jaitley, who described pollution and traffic in Indian cities as “a matter of concern.”

Buyers of small cars will now pay a tax of 1%, while diesel cars will be taxed at 2.5%. SUVs and vehicles with bigger engines will be hit by a 4% tax.

Thirteen of the 20 most polluted cities are in India, according to air quality data released by the World Health Organization in 2014. India’s capital New Delhi, which is home to more than 20 million people, topped the list.

As I teach in class, pollution from vehicles is an example of a negative externality. When people drive around in vehicles, the emissions affect not only the buyer and seller of the vehicle, but others as well. Because it affects these “others” who are external to the market transaction, it’s called an externality. And because people think pollution is bad all else equal (exception: Elmer Fudd as Siegfried in What’s Opera Doc?*), it’s a “negative” externality.

I also teach that a possible way to increase economic efficiency in the presence of a negative externality is to impose a tax which discourages the action that creates the externality. In this case, India is imposing a bigger tax on vehicles which pollute more, all else equal, to discourage purchases of higher-polluting vehicles. Although, as my colleague and former adviser Tim Haab says here, there’s a much more straightforward approach to address the problem.

* Smooooog! See 5:39 here.

HT: Dr. Freeman

Air quality scares Pascagoula residents

From the Sun Herald:

A neighborhood along Bayou Casotte, in the heart of the state’s most industrialized county, has been co-existing with industry for decades.

But in the last two years, things have changed.

A sticky dust blows in and there’s a strong acrid smell that lingers day and night. Residents with heart or immune problems are reporting breathing issues.

Neighbors say when they mow their lawns, the dust that’s kicked up burns eyes, noses and skin. There is silica, cadmium, aluminum and other metals in soil samples. Smells persist.

Unfortunately the article doesn’t suggest any ideas about why the problem has suddenly appeared, or become worse, in the past two years. This is a classic externality problem, where production by industry creates a negative effect (air pollution) on a third party (the nearby residents).

Apparently the nearby industries have met with neighborhood representatives and have undertaken some actions, but one woman says that no one is taking responsibility:

She said Mississippi Phosphates came to her house with an air monitor to tell her the problem wasn’t theirs.

VT Halter shipbuilding has met with her several times. It responded to a call on May 14 and determined a smell she reported was not coming from Halter.

All the industry say they’re meeting air-permit requirements.

 

So one problem is that the source of the pollution can’t be identified, at least not by residents, without additional help. This makes it harder for different parties (the residents) to unite their voices against the polluter because the specific polluter is unknown.
A second problem is that the industries are meeting their air-permit requirements so they have little incentive to cut emissions further because it is costly to do so.
The Coase Theorem states that, under certain conditions, parties (here, the residents and the industries) can get together and solve an externality problem without any government or policy intervention. But one of those conditions is that the people negatively affected by the externality can get together and bargain with the polluter. Because the polluter can’t be identified, and because there are many people negatively affected by the pollution (which makes coordination challenging), this condition is hard to meet in this case. Policy intervention may therefore indeed be the best course of action…although I’m not saying there is or isn’t a need for it in this case specifically.

 

China’s war on pollution

(NY Times) In the first 4 months of 2014, China has imposed more than $1.7 million in fines against polluters.

Zhong Chonglei, an environmental official, told the state-run China News Service that the amount of the fines was double from the same period in 2013. Mr. Zhong said that in March and April, inspections of 3,300 companies and business enterprises took place, and 171 violations were discovered. In March, the Ministry of Environmental Protection reported that 71 of 74 cities monitored by the central government failed to meet minimum air quality standards last year.

Last month, the National People’s Congress, largely a rubber-stamp legislature, approved revisions to China’s environmental protection law that gave officials more power in imposing fines on polluters. Li Keqiang, the Chinese prime minister, has said that China is ready to “declare war against pollution.”

Economists love well-designed economic incentives. Here, polluters have an incentive to not violate pollution standards because if they do, they face a fine. While this is an incentive, it wouldn’t be considered a well-designed one from an economic point of view. The reason is that the pollution standards almost certainly were not designed in the first place with a goal of economic efficiency.

Economists would probably prefer a policy where each polluter is taxed per unit of pollution emissions. That way, polluters who can cut down on emissions more easily (at a lower cost) will do so (because it’s cheaper than paying the emissions fee), and polluters who can’t cut emissions cheaply will pay the fee (because it’s cheaper to pay the fee than cut down on emissions). With this type of policy, emissions are reduced in the cheapest way. The “pollution standards” currently in place probably (I say this based on experience with such policies – I don’t know the details of China’s policy) do not consider the fact that costs of reducing pollution vary across different polluters.

To environmental economists, the fines that polluters face for violating a pollution standard wouldn’t really be considered an “economic incentive” because they are not designed for economic efficiency. Rather they are just a means of enforcing some existing pollution regulation which is probably relatively inefficient from an economic point of view.

Externality watch: Air pollution leads to 7 million deaths

From BBC news, air pollution caused 7 million deaths in 2012:

Seven million people died as a result of air pollution in 2012, the World Health Organization estimates.

Its findings suggest a link between air pollution and heart disease, respiratory problems and cancer.

One in eight global deaths were linked with air pollution, making it “the world’s largest single environmental health risk”, the WHO said.

Nearly six million of the deaths had been in South East Asia and the WHO’s Western Pacific region, it found.

Largest single environmental health risk? I hadn’t hear that before but it makes sense because air pollution is a pretty much global phenomenon.

In general, environmental economists tend to think that pollution is not “internalized” meaning that the level of pollution is above the level which is economically efficient. Under economic efficiency there would definitely still be some air pollution because, although the pollution is costly, it would be even more costly to eliminate the pollution entirely.

Here’s how air pollution affects health:

Reducing air pollution could save millions of lives, said the WHO.

WHO family, woman and children’s health assistant director-general Dr Flavia Bustreo said: “Cleaning up the air we breathe prevents non-communicable diseases as well as reduces disease risks among women and vulnerable groups, including children and the elderly.

The WHO assessment found the majority of air pollution deaths were linked with cardiovascular diseases.

For deaths related to outdoor pollution, it found:

  • 40% – heart disease
  • 40% – stroke
  • 11% – chronic obstructive pulmonary disease (COPD)
  • 6% – lung cancer
  • 3% – acute lower respiratory infections in children

For deaths related to indoor pollution, it found:

  • 34% – stroke
  • 26% – heart disease
  • 22% – COPD
  • 12% – acute lower respiratory infections in children
  • 6% – lung cancer

New sulfur regulations to increase gas and automobile prices

From the New York Times, the EPA will soon force oil refiners to remove all sulfur from gasoline.

 The Environmental Protection Agency plans to unveil a major new regulation on Monday that forces oil refiners to strip out sulfur, a smog-forming pollutant linked to respiratory disease, from American gasoline blends, according to people familiar with the agency’s plans.

When burned in gasoline, sulfur blocks pollution-control equipment in vehicle engines, which increases tailpipe emissions linked to lung disease, asthma, emphysema, chronic bronchitis, aggravated heart disease and premature births and deaths.

The respiratory diseases and other health effects of pollution from automobile tailpipes are known as negative externalities in economics – bad (hence ‘negative’) effects on people who neither produced nor purchased the gasoline that’s being consumed (hence ‘externalities’ because the effects are on people external to the market transaction). The purpose of the regulation is obviously to try to decrease the negative externalities so that there are fewer negative effects on human health. The story continues…

The E.P.A. estimates that the new rule will drastically reduce soot and smog in the United States, and thus rates of diseases associated with those pollutants, while slightly raising the price of both gasoline and cars.

E.P.A. officials estimate that the new regulation will raise the cost of gasoline by about two-thirds of one cent per gallon and add about $75 to the sticker price of cars. But oil refiners say that it will cost their industry $10 billion and raise gasoline costs by up to 9 cents per gallon.

The E.P.A.’s studies conclude that by 2030, the cleaner-burning gasoline will yield between $6.7 billion and $19 billion annually in economic benefits by saving lives and preventing missed work and school days due to illness.

The new rule will have a significant impact on the health of low-income Americans who live near major highways…

But oil refiners say that the new rule will hurt their industry.

There are tradeoffs associated with this policy. It should reduce costs on human health, but will decrease consumer and producer surplus in the automobile and gasoline industries. This policy is said to pass the

One last tidbit from the article:

Mr. Drevna said it was easier to comply with the earlier regulations because removing the first 90 percent of sulfur molecules from gasoline can be done without difficulty. Wringing the last 10 percent of those molecules is harder.

“They’re tough little buggers that don’t want to come out,” Mr. Drevna said. “It’s like getting the last little bit of red wine stain out of a white blouse.”

In environmental economic theory, we learn that marginal cost of reducing pollution increases. That is, it’s relatively cheap to cut back on the first units of pollution but, as you cut back more and more, each additional unit becomes more costly to eliminate. Mr. Drevna’s statement here is consistent with the theory we propagate to our students!

 

The Cheapest Way to Skin a Cat

BBC News reports on a study arguing that pollution targets in the European Union are not strict enough:

A study confirming a link between atmospheric pollution and heart-attack risk strengthens the EU case for tougher clean-air targets, experts say.

Research in the BMJ looking at long-term data for 100,000 people in five European countries found evidence of harm, even at permitted concentrations.

Experts stressed that the risk to an individual was still relatively small.

And some argued the results were not conclusive as they did not take account of previous exposure to higher levels.

All this seems fine, but the next paragraph struck me:

Other factors, such as smoking or having high blood pressure, contribute more to a person’s risk of heart attack than pollution from traffic fumes and industry, they say.

It may well be that smoking and high blood pressure contribute more to the risk of a heart attack than local pollution, but this paragraph seems to imply that the “some experts” are saying we shouldn’t work on cutting down pollution and instead should be more concerned about battling smoking and high blood pressure. (And I’m not saying this is what the experts are saying, it’s just the impression that the paragraph gives the reader.)

In environmental economics we learn about cost-effectiveness analysis.  Cost-effectiveness analysis is used to determine the least-cost way to achieve some goal.  So, for example, if we want to reduce the risk of heart attack, we might put resources into discouraging smoking (anti-smoking campaigns), battling high blood pressure (anti-salt campaigns?), lowering local pollution (emissions taxes), or other strategies. We then try to determine how much we should invest in each strategy to reach a given goal (e.g. lowering the risk of heart disease by 10%) in the cheapest – that is, most cost-effective – way.

So, even though smoking and high blood pressure lead to a greater risk of heart attack than local pollution, it may yet be that, for a given reduction in the risk of a heart attack, it is more cost-effective to put our efforts into battling local pollution. Whether it is actually more or less cost-effective is another issue – I don’t know the answer because I haven’t studied the issue.  But unfortunately, while the article cites experts from environmental and respiratory medicine, it does not cite the views of any economists who have studied the issue.

That’s how an environmental economist would think about this issue…