Policy instruments and

Cost effective pollution control:

illustrations from air pollution from transport

ENE 423, lecture #5,

Sept. 13, 2023
Gunnar S. Eskeland
Reading: Eskeland: A Presumptive
Pigovian tax on Gasoline. Kolstad,
Chapter 5, Gunnar’s note Chapter 2
From gunnar’s analytical note:

i) What is cost effectiveness: attaining a given environmental goal (specific air quality, for
instance, or specific target for total emissions of pollution into the air, or for ‘emission
reductions’, at the lowest possible social (meaning total, across individuals, across firms)
cost.

ii) What is an implication of – or a result for - cost effectiveness:

marginal abatement costs shall be equal across polluters, across polluting goods, across
technological and behavioral options:

The criterion of cost effectiveness might imply that one family, rich or poor, must do all the
abatement (the iron mill owner, for instance, or the leather tanner). But if we assume some
structure like: the abatement cost function is continuous, twice differentiable, and convex, and
marginal abatement costs start at zero: then all will abate, and non fully and macj=mack.

Justification? One justification may be that policy maker has other policy instruments more
suitable for redistribution than the pollution control program itself. School subsidies, for
instance, or food stamps, child support, social support, health insurance. So let us be watchful
if this justification is not really satisfactory, not really sufficient. Think of all this as analytical
tricks. So they should be helpful, or put away. Supplemented, both in terms of analysis, and
perhaps in policy instruments. The idea of cost effectivenss is kind of compelling. And not.
If cost effective pollution control CAN hit anyone with most of the bill (it will be the large
polluters), is it FAIR?

Well, in a way, it is not fair at all. But it is effective. If it can be done. In principle it can. In
practice; yes, quite often, to a large extent.

It is also very similar to how a market economy finds and uses steel producers, bread
producers, apple producers: it asks who can do it most cheaply. And producers submit their
bids so that marginal costs (of steel, ..) are the same across producers (including the shadow
prices of capacity constraints).

Is it fair? No. At least not in the short term. Krupp and Mittal gets steel contracts, not Karl,
Jennie, or Gunnar. If you ask Gunnar, he does not mind. Never wanted to produce steel.

Perhaps it is more ‘fair’ in the long run: Gunnar can try to be a steel producer, just as Krupp
and Mittal have done. So perhaps it is fairer in the long run. Most importantly, it is effective:
producing steel – and emission reductions – at the lowest possible social costs. Not fair. But
fairly effective, perhaps. In fact, none of us want to be a steel producer, at least not unless we
think we’ll be good at it.
 FIGURE 5.2 Production
possibilites with an
externality, steel and laundry.
ENVIRONMENTAL Charles D. Kolstad Copyright ©
FIGURE 5.4 Pareto relevance of externality. (S0,L0), steel
and laundry production without
coordination; (S1,L1), steel and laundry production with
firms merged; Y1, value of
output of merged firm; Y0 value of output without
coordination; (ps, pL), prices of steel and laundry.
ENVIRONMENTAL Charles D. Kolstad Copyright ©
 Efficient, and cost effective
Have in common: disregard for distribution of consequences
More innocently put: ‘abstracting from distributive considerations’
• Important justifications:
– Assume policy maker has other, costless policy instruments for
redistribution available (such as lump sum transfers)
– An efficiency oriented policy or reform (there are many) has in it
the possibility of hypothetical compensation: since net gains are
created, winners could compensate losers
– Perhaps a sensible political commitment (or delegation) is that
government pursues efficiency (in envt’l policy?) and citizens
accept that there are many reforms:Over many reforms, larger net
output is created, larger tax base, greater redistributive capacity.
Sometimes you win, other times loose. Net gains?
– Pollution control is complicated (the principles are not). If you bring
in (too much) distributional considerations, it becomes complicated.
But yes, distributional issues will be raised, rightly and wrongly.
These arguments have, as you see, their limitations. The principles are
powerful, and the underpinnings have their limitations. We will touch on
how it sometimes work out in practice.
 Let us remind ourselves the idea of consumer
surplus (CS), producer surplus (PS)

Be on top of things:
• Why is the demand curve downwardsloping?
• Why call it mwp?
• Why is supply upwardsloping.
• Called MC?
• What is an equilibrium output and price?
• Is it also efficient?
Price per • Remember the welfare theorems?
liter

Supply curve;
CS marginal cost of
production?

PS Demand curve: MWP, for gasoline!

Any good: liters of gasoline

Then, practical challenges with air quality control from cars
(and Mexico City, and Oslo, and Bergen)
Do we have the ideal emission tax available?
(we can mimic – imperfectly - an emission tax: with a combination of fuel tax and emission
standards)

We control several air pollutants at the same time: how do we prioritize between them
(we use health based weights: lead is very damaging per gram compared to ‘ordinary’ dust per
gram). In such analysis, we have (some) benefits of pollution reductions in the weights
between pollutants (lead, sulfates, dust), but still limit our analysis to benefit weighted cost
effectiveness (hold your breath).

Transportation delivers mobility benefits: how is this accounted for

(welfare economics, basics: revealed preference through demand curve: consumer surplus)

Policy instruments also have income distribution effects: how is this accounted for?
(textbook is easy, politics complicated, came out favorably)
Choice of question in this study:

cleaner cars and fuels,

vs
less driving

(Can you hear that this is a costeffectiveness

question?). (Do you know what that means?)
This analysis uses the idea of consumer
surplus as a measure of the welfare cost of
reducing driving, and thus of the costs –
benefits ignored – of reducing air pollution,
but it thinks of revenue to government as
equally valuable.
This analysis uses the idea of consumer
surplus as a measure of the welfare cost of
reducing driving, and thus of the costs –
benefits ignored – of reducing air pollution.

A result of the analysis is that the demand

curve for gasoline (above the supply curve) is
a supply curve for emission reductions (read
emission reductionts from right to left).
Here, we set a technical control cost curve – up
against the demand curve (downward sloping) to
demonstrate what is a cost effective combination of
demand reductions – driving reductions – on the one
hand, and cleaner cars and fuels – the technical
control curve.
• A way to combine two ‘supply curves’ to a cost effectiveness analysis is as
above left: a ‘bath tub’ model. It works for fixed total quantity of emission
reductions targeted.
• Another way is by horizontal summation (right). The latter asks; for any price,
what is offered by supplier 1 plus supplier 2. The way a market would do it. For
any quantity. The lower curve includes ‘matching’ gasoline tax, and ‘matching
demand reductions’. The shaded area is the welfare costs of not including
demand reductions in your strategy, or tool chest.
Here is also some ‘distance’ and practicality in our analytical aparatus: (including how we build
and use the two graphs top left and top right)

What does it mean that Karl’s marginal abatement costs for his car shall equal those for (his)
bus, or those included in his bus ticket?

Say Karl does not have a car. So his car emissions are zero. Then his marginal costs of emissions
from car rise vertically from (very near) zero emissions. So: they point upwards from origo to
very high (say infinite).

When you set another marginal abatement cost (from bus, say) against that vertical ‘curve’
(which offers nothing), then you have your optimum: Karl’s bus will have offer all Karl’s emission
reductions. This is how curves are built. Notice that the curve, all such curves, stepwise (above
right) can be approximated, or generalized, to be rising (top right). Often, they bend upwards,
too. Because our imagination is exhausted, and also: emissions are. As w Karl’s nonexisting car.
 Some lessons:
• Benefits not valued => rank according to cost effectiveness=costs of
emission reductions in terms of other goods and services (money, NOK,
for instance, could be the unit of measurement)
• Still may need, at least, relative prioritization of pollutants (upcoming
lecture)
• Emission tax unavailable=> separate and use different instruments for
– Cleaner cars and fuels
– Less use of the polluting good (gasoline, or driving)
• For cleaner cars and fuels:
– instruments such as emission standards
• For less driving (and intermodal substitution)
– Instruments such as gasoline taxes, road user charges, public transport
subsidies (or driving ban?)

(The textbook ideal instrument of an emission tax, equal per unit of

emissions or damage to all, would do all of this)
 Some lessons:
– The textbook ideal instrument of an emission tax, equal per unit of
emissions or damage to all, would do all of this, but will often not really be
avaiable in ways similar to in the textbook

– For instance; continuous monitoring (by the king) of emissions from each
tailpipe, for a tax bill of cumulative individual emissions, is not available,
but
• Emission standards can be monitored, establishing emission rates (Grams
Nox/vkm, for instance, or grams/nox per liter gasoline) can be established,
but cannot really be combined (multiplied by vkm/yr, for instance), and
• Gasoline can be taxed, discouraging vehicle use, but then independently of
vkm/yr 
So this is an example of imperfect policy instruments complementing each
other.
- Say that at this point (Norway) it bothers you that raising gasoline costs to
further discourage urban car use (where there is pollution), bothers you
because it also makes driving harder in rural areas.
- Then you wish for policy instruments with (such) geographical
differentiation. So you may consider urban toll rings (or more advanced) or
higher public transport subsidies.
- So: imperfect instruments are introduced as complements if and when
imperfections become too troubling.
Some (other) lessons:
• Any vehicle kilometer: better the ‘larger’, better the ‘fuller‘
• Any vehicle modification (costlier, cleaner): ‘better the larger,
fuller, more heavily used’ (higher passenger kilometer per vehicle
kilometer, higher vehicle kilometer per vehicle, higher remaining
life time of modification, of vehicle).
• Negative cost items: should not be expected, should be viewed
with suspicion: did we do something wrong in our analysis?
Discuss it: typically associated with flawed general incentives (fuel
subsidies, most typically, with other akward policy combinations,
but also, often, with flawed analysis)
How important is ‘demand management’
relative to technology and ‘abatement’
1) For air quality (Sox, Nox, PM, CO, NMHC, lead), technotype abatement has created great benefits
(catalytic converters, unleaded gasoline, pm-filters, improved ignition systems), cutting emission factors by
90, 99 and 100 percent (g/vkm). So technical controls have been very effective (in this language: doing the
job).
2) for CO2 (greenhouse gas, but not in other ways an air quality issue), most or all mitigation options involve
reducing fuel use, including shifts from coal to petrol, petrol to gas, to biofuels (?) and to electricity. So
‘technical controls’ are not very effective, in this language. Fuel taxes ARE effectiv, in this language: doing the
job.
3) Synergy – or cobenefits, auxiliary benefits – are therefore strongests from CO2 reductions to air quality
improvement, not so much the other way, since there are other ways – often cheaper ways – to improve air
quality than by reducing combustion as such.
4) Many are ‘elasticity pessimists’ especially for transport and transport fuels: ‘not much we can do about
demand’ or ‘people need to get to work, Gunnar’. Gunnar: demand reductions are just like any other
abatement option: you do not know unless you try. A way to try is to price. Or to mimic a price increase. Price
emissions. Price the environment. At least try. At least pretend. Even thinking about it helps.
 Somewhat broader
• Many countries use fuel efficiency standards, one way or another,
for instance CAFE: corporate average fuel efficiency standards. It
can be equivalent, or close, to a greenhouse gas standard (grams
CO2 per vehicle km);
• Norway uses a co2 differentiated registration tax very high in
terms of (NOK per gCO2/vkm), but Norway gives, separately,
more generous tax exemptions to zero emission (electric) vehicles
• This gives vehicles with low variable operating costs. So does it
give too much driving? Perhaps not?:
– Also fuel taxes, including CO2 part, about 400 NOK per ton CO2
(about a third of total VAT incl fuel taxes)
– Also highway tolls and urban tolls, incl rush-hour extras
– Also public transport subsidies, urban parking limitations, etc
• So it seems the idea of combining imperfect instruments is
somewhat appreciated&exploited. But then: instrument use in
Norway is very heavy handed. So somewhat skillful combinations
should not surprise too much.
Later, we continue with policy instrument choice and transport, incl ‘Hoy
no circula’: today (this car) does not drive…
Reading: Rationing can backfire
important ideas: information revelation, selection properties, behavioral
responses

But on Friday, sept 15th: a brief intro to cost benefit analysis of the climate
problem (a lousy and incomplete and inconclusive analysis, by the way),
since on wedn Sept 20th we’ll have

Prof Drange on ‘climate science’.

So, having a brief eccs intro before that, is helpful

Here is a very brief intro: What we call cost-benefit analysis is free of

distributional concerns, much like cost effectiveness analysis (almost),
minimizing social – total - costs (on this planet).
So: one big part of climate mitigation, namely cooperation problems, is
glossed over, or abstracted from.
What remains is a very long term ‘investment problem’. Interesting enough,
demanding enough.