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2.4. Environmental Effects of Incentive Approaches

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Savings from Economic Incentives

A full understanding of the effectiveness and economic efficiency of incentive programs requires information on the realized environmental benefits. The literature focuses almost exclusively on the cost side because of the presumption that the same environmental goals are being sought. In comparing incentive-based policies with command and control approaches, or among different incentive-based policies, there may be impacts on environmental quality that would be of interest to regulators and other parties.

Generally, incentive mechanisms based on trading are designed to produce environmental effects that closely approximate what would be achieved through a command and control approach. Some distinctions still apply, however, in that a 'cap and trade' policy is likely to give greater control over total emissions than is an 'open market' trading approach. Open market approaches do not provide a limit on total emissions; credits may be generated as sources see fit. If there is to be a control on total emissions, it would have to come from a companion command and control regime. In contrast, under a capped trading program, total emissions are limited. Either type of trading will reduce total emissions if trading ratios of greater than 1:1 are required. Some trading program described in this report have that feature (e.g., fireplace permit trading) but others do not (e.g., acid rain allowances).

While trading approaches may achieve the same reduction in emissions as a command and control program, the distribution of the reductions is likely to be different. This has been a recurring source of concern, namely what increase in pollution in one area may be tolerated in exchange for reductions elsewhere. Both the RECLAIM and Acid Rain programs have been challenged in court because of alleged adverse impacts in localized areas. EPA's Air Emission Trading Program was crafted carefully to avoid adverse localized impacts, but at a high cost in terms of barriers to trading.

Emission tax systems typically have not been designed to have an environmental impact. Rather, modest revenue raising has been the principal goal. However, in the few examples for which emission fees have been set at a level intended to have environmental impacts, the benefits were greater than forecast (Swedish NOx and SO2 charges, and United States CFC charges).

Deposit systems appear to produce environmental effects greater than would be expected through a command and control method; however, there appears to be a threshold of deposit size needed in order to induce people to achieve the desired environmental objective. For example, deposits on automobile bodies function well in assuring the proper disposal of car hulks when set at a high enough level (see the section on international experiences). In contrast, thousands of abandoned car hulks are removed at city expense in New York each year despite regulations prohibiting that type of disposal.

Variations in environmental effects can be important in evaluating the overall desirability of different approaches. Often it is not correct to simply assume various approaches yield the same result. Oates et al. (1989) describe an example of particulate matter control in the Baltimore region in which 'over control' in some areas required under a command and control approach yields environmental improvements that lessen the relative attractiveness of an incentive-based policy that produces more uniform pollutant concentrations.

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