How would you set up a cost benefit analysis of a program to reduce air pollution in a city

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How would you set up a cost benefit analysis of a program to reduce air pollution in a city

International emissions-trading markets were created precisely to exploit differing MACs. Example[ edit ] Emissions trading through Gains from Trade can be more beneficial for both the buyer and the seller than a simple emissions capping scheme.

Consider two European countries, such as Germany and Sweden. Each can either reduce all the required amount of emissions by itself or it can choose to buy or sell in the market.

On the left side of the graph is the MAC curve for Germany. Thus, given the market price of CO2 allowances, Germany has potential to profit if it abates more emissions than required. On the right side is the MAC curve for Sweden.

Thus, given the market price of CO2 permits, Sweden has potential to make a cost saving if it abates fewer emissions than required internally, and instead abates them elsewhere.

How would you set up a cost benefit analysis of a program to reduce air pollution in a city

After that it could buy emissions credits from Germany for the price P per unit. The internal cost of Sweden's own abatement, combined with the permits it buys in the market from Germany, adds up to the total required reductions RReq for Sweden.

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This represents the "Gains from Trade", the amount of additional expense that Sweden would otherwise have to spend if it abated all of its required emissions by itself without trading. Germany made a profit on its additional emissions abatement, above what was required: Additionally, Germany sold its surplus permits to Sweden, and was paid P for every unit it abated, while spending less than P.

Sweden bought emission permits from Germany at a unit price P. If the total cost for reducing a particular amount of emissions in the Command Control scenario is called X, then to reduce the same amount of combined pollution in Sweden and Germany, the total abatement cost would be less in the Emissions Trading scenario i.

The example above applies not just at the national level, but also between two companies in different countries, or between two subsidiaries within the same company. Applying the economic theory[ edit ] The nature of the pollutant plays a very important role when policy-makers decide which framework should be used to control pollution.

Cost-benefit analysis to reduce air pollution in a city

CO2 acts globally, thus its impact on the environment is generally similar wherever in the globe it is released. So the location of the originator of the emissions does not matter from an environmental standpoint.

SO2 and NOxand also mercury because the impact of these pollutants may differ by location. The same amount of a regional pollutant can exert a very high impact in some locations and a low impact in other locations, so it matters where the pollutant is released.

This is known as the Hot Spot problem. A Lagrange framework is commonly used to determine the least cost of achieving an objective, in this case the total reduction in emissions required in a year.

In some cases, it is possible to use the Lagrange optimization framework to determine the required reductions for each country based on their MAC so that the total cost of reduction is minimized. In such a scenario, the Lagrange multiplier represents the market allowance price P of a pollutant, such as the current market price of emission permits in Europe and the USA.

This is also another version of the Equi-Marginal Principlecommonly used in economics to choose the most economically efficient decision. Prices versus quantities, and the safety valve[ edit ] There has been longstanding debate on the relative merits of price versus quantity instruments to achieve emission reductions.

Uncertainty in future supply and demand conditions market volatility coupled with a fixed number of pollution permits creates an uncertainty in the future price of pollution permits, and the industry must accordingly bear the cost of adapting to these volatile market conditions. The burden of a volatile market thus lies with the industry rather than the controlling agency, which is generally more efficient.

However, under volatile market conditions, the ability of the controlling agency to alter the caps will translate into an ability to pick "winners and losers" and thus presents an opportunity for corruption.

In contrast, an emission tax is a price instrument because it fixes the price while the emission level is allowed to vary according to economic activity.

A major drawback of an emission tax is that the environmental outcome e. On one hand, a tax will remove capital from the industry, suppressing possibly useful economic activity, but conversely, the polluter will not need to hedge as much against future uncertainty since the amount of tax will track with profits.The Texarkana Gazette is the premier source for local news and sports in Texarkana and the surrounding Arklatex areas.

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