ECON 391

Economics of the Environment

Chapter 11
Standards

Stefania Strantza Summer 2020

Economics, Concordia University
Learning Objectives
1. Define and illustrate graphically the socially efficient
emission standard
2. Explain the complexities in setting standards when
the MDs differ by area, time of day or other factors
3. Describe and illustrate graphically how to achieve a
cost-efficient equilibrium under a standard when
either the MDs differ or the MACs for polluters differ

STANDARDS 2
Learning Objectives
4. Explain the ability of standards to spur investment
in new technologies that can lower emission
intensity
5. Describe the challenges faced in enforcement of
standards

STANDARDS 3
Environmental Standards
• Standards are a type of command-and-control (CAC)
technique, also known as direct regulation
̶ for example, an emission standard is a maximum level
of emissions that is legally allowed
• A governing body simply makes it illegal to emit past a
certain level and uses courts, fines and other law
enforcement measures to ensure compliance

STANDARDS 4
Environmental Standards
• Standards are a type of command-and-control (CAC)
technique, also known as direct regulation
̶ for example, an emission standard is a maximum level
of emissions that is legally allowed
• A governing body simply makes it illegal to emit past a
certain level and uses courts, fines and other law
enforcement measures to ensure compliance

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 The Socially Efficient Standard
• The socially efficient standard
is E*, where MD = MAC

STANDARDS 6
 The Socially Efficient Standard
• Emitters must pay the MAC
up to this point
• The total abatement costs are
called also compliance costs

STANDARDS 7
 The Socially Efficient Standard
• The total social cost is
minimized at E*

STANDARDS 8
Advantages of Standards
• Appear to be simple and direct
• Apparently set clearly specified targets
• Appeal to people’s sense of getting environmental
pollution reduced immediately
• Are consistent with our ethical sense that pollution is
bad and ought to be declared illegal
• Conform to an operation of the legal system, which is
to define and stop illegal behavior

STANDARDS 9
Emission Standards
• Emission standards are never-exceed levels applied
directly to the quantities of emissions coming from
pollution sources
• They are performance standards because they refer
to end results that polluters who are regulated must
achieve

STANDARDS 10
Emission Standards
• Emission standards can be set on a wide variety of
different bases, for example:
̶ emission rate (e.g., kilograms per hour)
̶ emission concentration
̶ total quantity of residuals
̶ residuals produced per unit of output
̶ residuals content per unit of input

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Technology Standards
• Technology-based standards (TBS) are standards that
don’t actually specify some end result, but rather the
technologies, techniques or practices that potential
polluters must adopt
̶ for example, the requirement that cars be equipped
with catalytic converters or seat belts, is a technology
standard

STANDARDS 12
Performance vs Technology Standards
• A performance standard (e.g., emission standard) sets a
constraint on some performance criterion and then
allows people to choose the best means of achieving it
• A technology standard actually dictates certain decisions
and techniques to be used, such as particular equipment
or operating practices to be used by polluters

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Performance vs Technology Standards
• A performance standard (e.g., emission standard) sets a
constraint on some performance criterion and then
allows people to choose the best means of achieving it
• A technology standard actually dictates certain decisions
and techniques to be used, such as particular equipment
or operating practices to be used by polluters

STANDARDS 14
Setting Standards
• In theory, setting the level of the standard is
straightforward
̶ the socially efficient standard equates marginal
damages to marginal abatement costs
• In practice, to achieve social efficiency, regulators
need to have proper information about the marginal
damage and the marginal abatement cost functions

STANDARDS 15
Setting Standards
• In theory, setting the level of the standard is
straightforward
̶ the socially efficient standard equates marginal
damages to marginal abatement costs
• In practice, to achieve social efficiency, regulators
need to have proper information about the marginal
damage and the marginal abatement cost functions

STANDARDS 16
Setting Standards - Different MDs
• Setting a single uniform standard across different
areas creates inefficiencies
̶ for example, low air quality in an urban area is likely to
cause more damage than in a rural area
̶ the efficient level of pollution can not be achieved in
both areas under the same standard

STANDARDS 17
 Setting Standards - Different MDs
• A uniform standard cannot $
MDU
be efficient simultaneously
in the two areas
MDR
̶ if it is set at EU it will be overly
stringent for the rural area
̶ if it is set at ER it will not be MAC
tight enough for the urban
area EU ER Emissions

STANDARDS 18
 Setting Standards - Different MDs
• A uniform standard cannot $
MDU
be efficient simultaneously
in the two areas
MDR
̶ if it is set at EU it will be overly
stringent for the rural area
̶ if it is set at ER it will not be MAC
tight enough for the urban
area EU ER Emissions

STANDARDS 19
 Setting Standards - Different MDs
• A uniform standard cannot $
MDU
be efficient simultaneously
in the two areas
MDR
̶ if it is set at EU it will be overly
stringent for the rural area
̶ if it is set at ER it will not be MAC
tight enough for the urban
area EU ER Emissions

STANDARDS 20
 Setting Standards - Different MDs
• A uniform standard cannot $
MDU
be efficient simultaneously
in the two areas
MDR
̶ if it is set at EU it will be overly
stringent for the rural area
̶ if it is set at ER it will not be MAC
tight enough for the urban
area EU ER Emissions

STANDARDS 21
Setting Standards - Different MDs
• When marginal damages for a pollutant vary by area,
time of day or season, a uniform standard will not be
socially efficient
• Individual standards that set the MAC equal to each
MD are socially efficient
̶ tailoring a policy to heterogeneous situations makes it
more efficient in terms of its impacts
̶ more information are required to set and enforce the
standard

STANDARDS 22
Setting Standards - Different MDs
• When marginal damages for a pollutant vary by area,
time of day or season, a uniform standard will not be
socially efficient
• Individual standards that set the MAC equal to each
MD are socially efficient
̶ tailoring a policy to heterogeneous situations makes it
more efficient in terms of its impacts
̶ more information are required to set and enforce the
standard

STANDARDS 23
 Setting Standards - Different MDs
$
MDU
• Individual standards can be
set in the two areas
MDR
̶ standard for urban area at Eu
̶ standard for rural area at ER
MAC

EU ER Emissions

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Standards and the Equimarginal Principle
• The equimarginal principle requires that the different
sources of emissions must be controlled in such a way
that they have the same MACs
• So that, a cost-effective equilibrium can be achieved
̶ the total costs of compliance are minimized for a given
emissions target

STANDARDS 25
Standards and the Equimarginal Principle
• A major problem with standards is that authorities
tend to apply the same standards to all sources
̶ it is easier and gives the impression of being fair to
everyone
• Uniform standards will be cost-effective only in the
unlikely event that all polluters have the same MACs
• If MACs for a pollutant differ, individual standards will
achieve cost-effectiveness

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Cost-Effectiveness when MACs Differ

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Cost-Effectiveness when MACs Differ

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Cost-Effectiveness when MACs Differ
• The cost-effective equilibrium is reached where the
MACs of the two polluters are equal and their total
emissions equal the target level

MACH = MACL
EH + EL = target level

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Cost-Effectiveness when MACs Differ
• The cost-effective equilibrium is reached where the
MACs of the two polluters are equal and their total
emissions equal the target level

MACH = MACL
EH + EL = target level

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Cost-Effectiveness when MACs Differ
• One producer has a higher MAC than the other
• Uniform standards
̶ it is not cost-effective because it does not follow the
equimarginal principle: MACH > MACL
• Individual standards
̶ it is cost-effective and results in lower total costs of
abatement to reach the target level of emissions

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Cost-Effectiveness when MACs Differ
• When MACs vary across sources, the uniform
standards cost more for a given target than the
individual standards
̶ individual standards is the cost-effective approach
that satisfies the equimarginal principle
• To set individual standards, regulators have to know
the MACs for each polluting source

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Incentive Effects of Standards
• Standards often do not provide incentives to find new
ways of reducing emissions in a more cost-effective
manner
1. If the standard is being met, there is no incentive to do
any better, even though the costs of further emission
reductions might be quite low
2. Technology standards create poor incentive to develop
new technologies because if they were developed, there
is no guarantee they could be used

STANDARDS 33
Incentive Effects of Standards
• Standards often do not provide incentives to find new
ways of reducing emissions in a more cost-effective
manner
1. If the standard is being met, there is no incentive to do
any better, even though the costs of further emission
reductions might be quite low
2. Technology standards create poor incentive to develop
new technologies because if they were developed, there
is no guarantee they could be used

STANDARDS 34
Incentive Effects of Standards
• Standards often do not provide incentives to find new
ways of reducing emissions in a more cost-effective
manner
1. If the standard is being met, there is no incentive to do
any better, even though the costs of further emission
reductions might be quite low
2. Technology standards create poor incentive to develop
new technologies because if they were developed, there
is no guarantee they could be used

STANDARDS 35
Technology Forcing Standards
• Technology-forcing standards are extremely high
standards that are not possible with today’s technology
• They can force polluters to develop new control methods
• But stricter standards create the incentive for polluters
to seek relief from public authorities through delaying
the date when they become applicable
̶ waste resources for pollution-control R&D to influence
political authorities to delay the onset of strict standards

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Technology Forcing Standards
• Technology-forcing standards are extremely high
standards that are not possible with today’s technology
• They can force polluters to develop new control methods
• But stricter standards create the incentive for polluters
to seek relief from public authorities through delaying
the date when they become applicable
̶ waste resources for pollution-control R&D to influence
political authorities to delay the onset of strict standards

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Incentives to Invest in New Technologies
• Emission standards create positive incentives for
R&D in pollution control
• These incentives are weaker than those of other
pollution-control policies

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Incentives to Invest in New Technologies
$

MAC1

MAC2 MD

E1 * E

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Enforcement Costs
• Enforcement costs include: the monitoring of
equipment, the expertise of personnel, the operation
of the court system, etc.
• Stricter standards may involve larger enforcement costs
because they require larger operating changes on the
part of sources
• Sources faced with the possibility of having to pay
substantially higher fines would presumably have a
stronger incentive to come into compliance

STANDARDS 40
Enforcement Costs
• Enforcement costs include: the monitoring of
equipment, the expertise of personnel, the operation
of the court system, etc.
• Stricter standards may involve larger enforcement costs
because they require larger operating changes on the
part of sources
• Sources faced with the possibility of having to pay
substantially higher fines would presumably have a
stronger incentive to come into compliance

STANDARDS 41
Enforcement Costs
• With limited enforcement budgets, regulators must
often rely on self-monitoring where sources themselves
keep the books on emissions flows over time
̶ it is common in Canadian environmental protection
• Why would a polluter report honestly?
• The typical reason is a strong incentive to do so
provided by the system of fines

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Setting and Enforcing Standards
• One very common feature of environmental standards is
that they are usually set and enforced by different
groups of people
̶ standards are often set by national authorities;
enforcement is usually done by local authorities
• For example, in Canada the air-quality standards are set
at the federal level, but much of the enforcement is
carried out by provincial agencies

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Setting and Enforcing Standards
• If little thought is given to enforcement costs when a
standard is set at the national level, local authorities have
to deal with high costs
• Standards may end up having a lot more flexibility than
might at first appear
̶ laws written at national levels are specific and apparently
applicable everywhere
̶ at the local level, authorities may be more “flexible” in
their enforcement of the standards, due to limited budgets
and pressure from local interest groups (the polluters)

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Overview
• Examined how standards can be applied
• Uniform standards create inefficiency when
MDs/MACs differ
• Individual standards are required in order achieve a
cost-effective equilibrium
• Emission standards create positive incentives for R&D
in pollution control, though these are weaker than
those of other pollution-control policies

STANDARDS 45