MASTER’S THESIS
Benefits from
Environmental Taxation
A Case Study of the US Tax on Ozone Depleting Substances
HENRIK GÅVERUD
2004:035 SHU
Social Science and Business Administration Programmes
ECONOMICS PROGRAMME
Department of Business Administration and Social Sciences Division of Social Sciences
Supervisor: Anna Dahlqvist
2004:035 SHU • ISSN: 1404 – 5508 • ISRN: LTU - SHU - EX - - 04/35 - - SE
ABSTRACT
In subsequent years the production and consumption of ozone depleting substances (ODS) have been rapidly and worldwide reduced in order to fulfill the conditions in the Montreal Protocol (1987). According to economic theory it is more effective to use a market-based system than a regulatory one since the former combines environmental improvements and economic efficiency. A regulatory system will instead cause economic inefficiency. The US is one country that decided to use a market-based tax system in order to replace ODS. The purpose of this thesis is to evaluate the environmental benefits in monetary terms and in terms of reduced cases of negative human health effects caused by the US tax on ODS. Additionally the economic costs and the net result of the tax will be calculated by combining the result of two existing studies. The approximated estimations of the net results of the ODS tax in the US is at least 32.87 billion of 1997 US Dollars. Additionally the tax has lead to at least 2,812 reduced cases of melonama skin cancer, 221 reduced cases of non-melonama skin cancer, 19,006 reduced cases of cataracts and 49 reduced fatalities from skin cancer.
SAMMANFATTNING
I enlighet med Montrealprotokollet (1987) har produktionen och konsumtionen av ozonförtunnande substanser (ODS) kraftigt reducerats över hela världen. Ekonomisk teori förespråkar ekonomiska styrmedel såsom skatter och överlåtbara utsläppsrättigheter framför kvantitativa regleringar då de förstnämnda genererar både ekonomisk effektivitet och miljömässiga förbättringar medan den sistnämnda metoden visserligen med större sannolikhet når måluppfyllelsen men samtidigt skapar ineffektivitet på marknaden. USA har, till skillnad från de flesta andra länder, använt sig av skattestyrmedlet vid sidan av de internationellt överenskomna regleringarna vid reduktionen av användandet av ODS. Denna studie syftar till att utvärdera de miljömässiga förbättringar som beskattningen av ODS i USA genererat.
Metoden som används är att analysera tidigare gjorda studier inom ämnet. Genom att kombinera två av dessa studier beräknas ett nettoresultat av USA:s beskattning av ODS. Detta nettoresultat uppskattas till minst 32,87 miljarder US Dollar i 1997 års värde. Vidare har skatten bidragit till minst 2812 minskade fall av melonama hudcancer, 221 minskade fall av övrig hudcancer, 19006 minskade fall av starr och 49 reducerade dödsfall som en följd av hudcancer.
TABLE OF CONTENTS
ABSTRACT………..i
SAMMANFATTNING………....ii
TABLE OF CONTENTS………....iii
TABLES AND FIGURES………...v
Chapter I INTRODUCTION……….1
1.1 Background………1
1.2 Purpose………...2
1.3 Methodological Framework………..2
1.4 Scope………...3
1.5 Disposition………..3
Chapter II OZONE AND OZONE DEPLETION………4
2.1 Ozone in the Atmosphere……….4
2.2 The Depletion of the Ozone in the Stratosphere………4
2.3 Ozone-Depleting Substances (ODS)………6
2.4 Impacts from Ozone Depletion………8
2.4.1 Biological Impacts from Ozone Depletion……….8
2.4.2 Climate Impacts from Ozone Depletion……….8
Chapter III THEORETICAL FRAMEWORK………9
3.1 Market Failures……….9
3.1.1 Externalities………9
3.1.2 Collective Goods………10
3.1.3 Policy Failures………11
3.2 Environmental Policies……….11
3.2.1 Command-and-Control Systems………11
3.2.2 Taxes………..12
3.2.3 Tradable Permits………13
3.2.4 Subsidies………14
3.3 Valuing the Environment……….15
3.4 Environmental Valuation Methods……….16
3.4.1 Revealed Preference Methods………17
3.4.2 Expressed Preference Methods………..17
3.5 Summary………18
Chapter IV COSTS AND BENEFITS FROM TAXING ODS………19
4.1 The US Taxation of ODS………...………19
4.2 Costs and Benefits from Reducing the ODS-production………21
4.2.1 Costs from Substituting ODS………..21
4.2.2 Benefits from Substituting ODS……….23
4.3 The Estimated Net Benefits from the US Tax on ODS………..25
Chapter V CONCLUSIONS AND DISCUSSION………28
REFERENCES………31
APPENDIX A………33
APPENDIX B………...35
TABLES AND FIGURES
Tables
Table 2.1 The Montreal Protocol plan for phasing out ODS……….7
Table 4.1 The ODS and their ODP……….…20
Table 4.2 Estimated Costs of Replacing ODS 1987-2060 in units of Billion of 1997 US Dollars……….……..22
Table 4.3 Health Benefits from Reducing the Production and Consumption of ODS in Accordance with the Montreal Protocol 1987-2060………23
Table 4.4 Non-Health Benefits in Billion of 1997 US Dollars of Reducing the Production and Consumption of ODS in Accordance with the Montreal Protocol 1987-2060……….24
Table 4.5 Net Global Benefits from Phasing out ODS in units of 1997 US Dollars……….25
Table 4.6 Health Benefits from the US Tax on ODS………26
Figures Figure 3.1 Optimal Pollution……….…...10
Figure 3.2 Regulation of Emissions………...…11
Figure 3.3 Optimal Pigovian Tax………..…12
Figure 3.4 Market Equilibrium for Tradable Pollution Permits………13
Figure 3.5 Introducing a Subsidy………..…14
Figure 3.6 Compensating Surplus (CS) and Equivalent Surplus (ES)……….16
Chapter I INTRODUCTION
1.1 Background
The ozone layer constitutes a naturalising factor in the stratosphere. The depletion of the ozone layer affects the absorption of ultraviolet- (UV) and infrared radiation. High radiation may reduce human welfare since it can increase the risk of cancer and eye injuries, reduce crop yields, lower ocean productivity and disrupt terrestrial ecosystems. (Barrow, 1995)
In the early 1970s it was first claimed that the ozone in the atmosphere was being depleted.
These claims were not satisfactorily verified, but in the mid-1980s the scientific community concluded a significant reduction of the ozone concentration. The main cause of ozone depletion appears to be emission of chloroflourcarbons (CFCs). The most important sources of CFC emissions are the production, use and disposal of refrigerators, air-conditioning systems, foams, aerosol sprays and cleaning materials (Perman et al, 1999).
Hydrofluorocarbons (HCFCs), Halons, Methyl chloroform, Carbon tetrachloride and Methyl Bromide are other substances that contribute to the ozone depletion (ARC, 1997).
The depletion of the ozone layer is, in economic terms, a negative external effect. An external effect, or an externality, is a market failure that occurs when the production or consumption of one agent affects the utility of at least one other agent. In order to minimize the externalities taxes are one among other (subsidies, regulations and tradable permits) instruments used.
Economic theory prefer to give the actors in the market incentive to change their behavior rather than force them to do so, i.e. using taxes or a tradable permit system instead of quantitative regulations. In the US initially a tradable permit system was introduced (1989) but this system was replaced after just one year in use (1990) by a tax system. The reason of this change between economic instruments took place because the US government wanted to reduce the consumption of ODS below the caps. (Hoerner, 1995)
1.2 Purpose
The purpose of this thesis is to evaluate the environmental benefits in monetary terms and in terms of reduced cases of negative human health effects caused by the US tax on ozone depleting substances (ODS). Additionally the economic costs and the net result of the tax will be calculated.
1.3 Methodological Framework
The theoretical framework for this study is environmental economic theory. The theoretical chapter will focus on market failures, in particular externalities, and policies used in order to solve the problems occurring due to these failures. In the empirical framework studies evaluating the effect of the ozone depletion, the reduction of the use of ODS and the existing taxes on ozone-depleting chemicals in the US, will be reviewed and analyzed with the theoretical framework as a point of reference. In order to get a monetary estimation of the costs and benefits from the US tax of ODS calculations have been done in order to combine different studies/data. These calculations are based on data from the study Global Benefits and Costs of the Montreal Protocol on Substances that Deplete the Ozone Layer by Applied Research Consultants (ARC, 1997) and statistics from the report Production and Consumption of Ozone Depleting Substances under the Montreal Protocol 1986-2000 by United Nations Environment Programme (UNEP, 2003). Additionally the empirical framework and conclusions from the study Tax Tools for Protecting the Atmosphere: The US Ozone-depleting Chemicals Tax (Hoerner, 1995) has been used.
ARC (1997) have estimated the costs and the environmental benefits from phasing out ODS in accordance with the Montreal Protocol. The costs are in units of 1997 US Dollars and the benefits are divided into two groups, health effects and non-health effects. The non-health effects are also in terms of 1997 US dollars and the health effects are in terms of reduced cases and fatalities of skin cancer and cataracts. From this data it is possible to calculate a payback per cent, i.e. how much will one dollar spent on replacement investments pay back to the investor in terms of environmental improvements. Assuming that this payback is the same in the US as the mean global payback a calculation has been done estimating the US total benefit from phasing out ODS. Hoerner (1995) means that the tax has contributed to at least 290 thousand tones of a total decrease of 530 thousand tones of CFC-11 emissions. That means that the tax can credit about 56 per cent of the decrease. This share may give an indication of the total contribution of the tax. Given this an estimation of the net dollar
benefits was made in order to give an indication of the value of using the tax besides the regulations in order to phase out ODS.
1.4 Scope
The Montreal Protocol strictly regulates the production and consumption of ODS. Then each country can choose how to fulfill the goals in the Protocol. The thesis will evaluate the environmental benefits and the economic costs from the tax on ODS in the US.
1.5 Disposition
The thesis proceeds as follows. Chapter two, background, aims to give the reader a summarizing illustration of the ozone in the atmosphere, the human depletion of the ozone layer by producing and consuming given substances and finally the impacts from ozone depletion. Chapter three provides the theoretical background. The empirical framework, chapter four, introduces the reader to the US ODS-tax and additionally evaluates how existing studies estimate the benefits and costs from reducing the production of ODS. A calculation of the net benefit from taxing ODS in US is also made. In chapter five an discussion and the resulting conclusions will follow.
Chapter II
OZONE AND OZONE DEPLETION
This chapter constitutes the background of the thesis and is thought to give the reader an insight in the problems of depleting the ozone in the stratosphere. Why is ozone essential for human life on Earth? Which substances affect the ozone layer negatively and in which industries are/were these substances used? Finally, what are the long run effects of ozone depletion?
2.1 Ozone in the Atmosphere
Ozone (O ), which is one of the key components in the atmosphere, is produced by the action 3 of ultraviolet light on oxygen molecules. This chemical process, which occurs in the upper layers of the atmosphere, has perplexed scientists for decades and is still not completely understood. What is known is that the ozone concentration varies continuously as a result of decay and creation processes. There are also large variations of ozone concentration by time, spatial location and altitude. (Perman et al, 1999)
Ozone occurs at two levels in the atmosphere; in the stratosphere, which is between 15 and 50 kilometres above the ground, and in the troposphere, below 15 kilometres from the surface of the Earth. It is the ozone in the stratosphere, usually named the ozone layer, that protects all organisms on earth from about 90 percent of the high-energy solar ultraviolet (UV) radiation.
On the other hand the ozone in the troposphere is harmful to health and vegetation since high levels of it can damage plants and forests and cause problems to people with respiratory ailments (e.g. asthma). (Pearce, 1995)
2.2 The Depletion of the Ozone in the Stratosphere
Since ozone in the lower parts of the atmosphere has negative effects on ecosystems and human beings this chapter will focus on the depletion of the ozone in the stratosphere.
In 1926 the first measurement of ozone in the stratosphere took place. Until 1970 no significant change was noticed: the layer was getting neither thinner nor thicker. However in 1970 a reduction of the concentration of ozone was reported, the ozone-layer had become thinner and more UV-radiation was let through. (Pearce, 1995)
In the early 1970s scientists began to investigate the relationship between the use of certain chemicals and the depletion of the ozone in the stratosphere (Barrett, 2003).
Chlorofluorocarbons, usually named CFCs, were one among other chemicals that scientists focused on (Ibid.). In 1974 two scientists at University of California warned about the destructive impact that CFCs could have on the atmosphere (Ibid.). However at first the relationship was not completely verified, but in the late 1970s CFCs in aerosol sprays were banned in some developed countries e.g. the US and Sweden (Ibid.). In the mid-1980s World Meteorological Office and United Nations Environmental Programme (UNEP) confirmed that CFCs stayed in the atmosphere for a long time and destroyed the ozone layer through release of chlorine (Pearce, 1995). The chlorine stays active for long a time and one single chlorine atom can destroy 100,000 molecules of ozone (Hanley et al, 1997).
In 1984 the journal Nature published a study showing that the ozone-concentration had steadily fallen since 1956 (Ibid.). Two years later, in 1986, a British survey team discovered a huge “hole” in the ozone layer over Antarctica (Perman et al, 1999). The “ozone-hole” was in fact a reduction in ozone concentration between 60-95 percent over an area big as the United States (Ibid.).
To reduce the emissions of CFCs international meetings and negotiations started to take place, the first one in Vienna in 1985 (The Swedish Environmental Protection Agency, 2003). At the Vienna Convention an international cooperation in research, monitoring and exchange of information was agreed (Ibid.). Two years later, in the autumn of 1987, 25 countries agreed the Montreal Protocol on Substances that Deplete the Ozone Layer (Ibid.). The Montreal Protocol came into force in 1989 and the initially 25 countries were then increased by four more (Ibid.). The domestic production and consumption of ODS, in particular the use of CFCs, was by then international restricted (Ibid.). Nowadays 183 countries have signed the Protocol and thus there are just a handful of countries (e.g. Afghanistan, Eritrea, Iraq and San
Marino) left (Barett, 2003). Since 1987 there have been new meetings several times1, resulting in the Protocol being more and more restrictive (The Swedish Environmental Protection Agency, 2003). All CFCs, all Halons, 1,1,1-trichloroethane and HBFC are nowadays banned in all developed countries (Ibid.). The plan is that all ODS are going to be phased out all over the world in 2030 (Ibid.).
2.3 Ozone-Depleting Substances (ODS)
Before the relationship between ozone-depletion and CFCs was verified, CFCs were commonly used in refrigerators, air-conditioner systems, aerosol sprays, foams and cleaning materials (e.g. dry-cleaning establishments) (The Swedish Environmental Protection Agency, 2003). Until 1985, when the “ozone-hole” was discovered, the annual consumption of CFCs was about 750,000 tons (Linden, 1993). The total amount of CFC-emissions was thereby about 20 million tons (Ibid.).
When the Montreal Protocol was agreed the production and consumption of ODS were radically decreased, especially in the developed countries but also in the developing world. In Denmark, which is one of the leading countries phasing out ODS, the usage of these substances declined by 98 percent between 1986 and 1998. (The State of Environment in Denmark, 2001)
Since 1996 CFCs are banned in the developed countries (Perman et al, 1999). However in developing countries the production increased until 1999, but thereafter it decreased progressively and will continue to do so until it ends in 2010 (Ibid.). Initially hydrochlorofluorocarbons (HCFCs), which together with CFCs use to be called Freon, were used as the main substitute to CFCs in e.g. aerosols, foams, refrigeration and air-conditioning systems and solvents (The State of Environment in Denmark, 2001). However besides CFCs, HCFCs also have a negative effect on the ozone layer and therefore are strictly restricted.
(Ibid.). Other substances that affect the ozone layer negatively are controlled in the Montreal Protocol, or one of the amendments to the Protocol (Applied Research Consultants, 1997).
These are for example Halons, Methyl Chloroform, Carbon Tetra Chloride and Methyl Bromide (Ibid.). Halons, or halogenated hydrocarbons, are/were used primarily in fire fighting applications (Ibid.). Methyl Chloroform and Carbon Tetrachloride were added to the list of
1 London (1990), Copenhagen (1992), Vienna (1995), Montreal (1997) and Bejing (1999).
ODS at the conference in London in 1990 (Applied Research Consultants, 1997). The main use for these was/is as solvents (Ibid.). At the Copenhagen meeting in 1992 the last substances to be added to the ODS list was Methyl Bromide (Ibid.).
Table 2.1 The Montreal Protocol plan for phasing out ODS.
Substance Year phased out/ planned to be phased out in
Developed Countries
Year phased out/ planned to be phased out in
Developing Countries
Bromochloromethane 2002 2002
Carbon Tetrachloride 1996 2010
CFCs 1996 2010 Halons 1994 2010 HBFC 1996 1996 HCFCs 2030 2040
Methyl Bromide 2005 2015
Methyl Chloroform 1996 2015
Source: ARC, 1997.
Table 2.1 shows the plan for phasing out the ODS in the developed countries and in the developing countries2. Note that exceptions can exist for some substances in both developed and Article 5 countries.
Reducing the production and consumption of ODS means that other substances need to replace the ODS. Hydrofluorocarbons (HFCs) have become the fundamental substitute to Freon. HFCs do not contain any chlorine atoms and thus have no effect on the ozone in the stratosphere. HFCs are described to have “the appropriate thermodynamic properties to be used as technically and economically effective refrigerants fluids alternative to CFCs and HCFCs”. (EFTC, 2003)
2 Named as Article 5 countries in the Montreal Protocol.
2.4 Impacts from Ozone Depletion
To give the reader a well-illustrated example of the seriousness of ozone depletion one can mention that before the ozone layer was formed in the stratosphere the living on Earth was restricted to the seas. Thus ozone reduction may have both biological and climate impacts.
(Barrow, 1995)
2.4.1 Biological Impacts from Ozone Depletion
The biological impacts from depletion of the ozone layer are severe and in some ways uncertain (Ibid.). Since increased UV-radiation may reduce crops (e.g. soybeans) one negative effect is the threat to the world’s food supply (Ibid.). Other negative external effects from ODS are health damages (e.g. skin cancer, different kinds of eye injuries and allergic reactions) and upsets of natural biological cycles (e.g. loss of wildlife) (Ibid.). In particular the marine plankton is very sensitive to UV-radiation and a significant reduction of plankton affects the marine life and oceanic biogeochemical cycles seriously (Ibid.). That is because phytoplankton is at the very bottom of the ocean food chain (Ibid.). In fact the “ozone-hole”
has reduced the fish stock with 6-9 percent (Pearce, 1995). In the long run ozone depletion also may affect the human and animal immune system in a negative way although this impact is more uncertain (Barrow, 1995).
2.4.2 Climate Impacts from Ozone Depletion
The climate impacts from ozone depletion are more uncertain than the biological (Barrow, 1995). The long run impact will depend on different factors such as the quantity of the decreased ozone, the altitude of the depletion and the ozone concentration in the troposphere (Ibid.). If, for example, the ozone concentration in the troposphere increases the effect may be global cooling (Ibid.). Thus it is likely that increased UV-radiation is a contributor to global warming (Pearce et al., 1991).
Chapter III
THEORETICAL FRAMEWORK
This chapter aims to give the reader a theoretical insight in the environmental problem of market failures, different policies used to solve these problems and some practical issues on each solution. Finally there is also a discussion on different environmental valuation methods;
which are the benefits and problems with each of these methods?
3.1 Market Failures
According to fundamental economic theory the price will adjust the market into equilibrium, i.e. the supply curve equals the demand curve that generates an optimum price level (p*) and an optimum quantity (q*). However this assumes perfect competition, i.e. that the agents of the market have perfect information, that the property rights are well defined etc. If these assumptions are not satisfied we may not reach the market equilibrium. This can occur in different ways, e.g. if the market price is too high or too low. This phenomenon, called market failure, is frequently occurring in markets for environmental goods. This chapter aims to illustrate the problem with market failures in environmental markets. (Pearce & Turner, 1990)
3.1.1 Externalities
An external effect, or an externality, occurs when 1) one agents’ activity affects at least one other agents’ utility and 2) this welfare loss/win not is compensated for. Pollution from emissions is an example of a negative externality. Assume for example that firm A pollutes and that has a negative effect on person B (i.e. a negative externality or an external cost).
Furthermore assume that this effect is not compensated for. Depending on the property rights, i.e. whether firm A has the right to pollute or person B has the right to breathe fresh air, the agents (A and B) compensate each other and the optimal pollution level, W* in figure 3.1., is reached. (Ibid.)
Figure 3.1 Optimal Pollution
Source: Pearce & Turner, 1990
If B initially has the right to pollute, the starting point will beWB, i.e. the firm is profit maximizing without including the marginal external cost for A (MECA) in the calculations.
However if this is the case, “trade” will occur between firm B and person A. That is because the external cost for A when B pollutes is higher than B:s benefit (MNPBB) from polluting.
Therefore A will compensate B if lowering its emissions. Both A and B will get higher utility of this compensation. The compensating “trade” will continue until the marginal cost is equal to the marginal benefit, in point W*. If the situation initially is the opposite, i.e. if A has the right to non-polluting air, then B will compensate A. B:s marginal net private benefit (MNPBB) from polluting is higher than A:s disutility of some pollution (MECA). Initially the case will be WAbut as in the previous situation we will end up in W*, which is the optimal pollution level. (Pearce & Turner, 1990)
3.1.2 Collective Goods
A collective good is characterized of non-exclusion and non-rivalry. When a market fail to deny access to a good for agents who do not pay for it, a market failure has occurred since the resources then are not efficiently allocated. Fresh air is a well-illustrating example of this phenomenon of non-exclusion. Non-rivalry is when one persons’ consumption does not affect another persons’ consumption of the same good. An example of a non-rivalry market is the
“consumption” of a national park. (Perman et al, 1995) MECA
MNPBB
*
W W
Benefit Cost /
WA WB
3.1.3 Policy Failures
Another type of market failure is a political one. If there are for example well-organized interest groups (e.g. unions) who are capable of organizing many voters a government may make decisions that benefit these groups but harm the rest of the society. A government may also make a decision that give short run benefits despite the decision is “bad” in the longer run. (Pearce & Turner,1990)
3.2 Environmental Policies
The examples of market failure, described above, are common in environmental markets.
Undefined property rights, information problems and short run incentives to act long run irrational are examples of reasons of market failures. This chapter aims to go through the government policy alternatives to compensate existing environmental market failures.
3.2.1 Command-and-Control Systems
When the government uses a command-and-control system, i.e. a regulation, it decides how much the market at a maximum is allowed to pollute. Giving the agents quotas has the advantage that the uncertainty, which occurs when using taxes as environmental policy (see chapter 3.2.2), is eliminated since the goal is going to be fulfilled. However this system is, as we will see below, inefficient. (Pearce & Turner, 1990)
Figure 3.2 Regulation of Emissions Source: Pearce & Turner, 1990.
The regulation is not cost efficient since it does not give the market the right to abate emissions at the lowest cost. In this example firm A has a lower marginal abatement cost (MAC) compared to firm B. Nonetheless the firms will abate the same quantity of emissions.
The outcome is that the society will lose welfare. Area A is the dead-weight loss of the regulation. (Ibid.)
MACA MACB
Regulation
MACA
MACB
A
3.2.2 Taxes
Instead of giving the firms a maximum level allowed to pollute, the government can, by introducing environmental taxes, give the polluters economic incentives to abate or reduce the emissions. The idea of a tax aimed to add the social external cost to the initial private price was first introduced by the British economist Arthur C. Pigou (1877-1959) in his opus Economics of Welfare in 1920. (Pearce & Turner, 1990)
Figure 3.3 Optimal Pigovian Tax Source: Pearce & Turner, 1990.
In figure 3.3 the optimal Pigovian tax rate, t*, is shown. Initially the produced quantity isQ1 because at this point the marginal net private benefit (MNPB) is maximized. At quantity Q1 however the marginal external cost (MEC) is higher than MNPB from the production. This means that Q1 is not a Pareto-efficient production quantity since the MNPB curve does not include the external cost. The optimal quantity is instead Q*, i.e. where MEC is equal to MNPB. To give the producer incentive to decrease the produced quantity to Q* the government introduces the tax t*, i.e. a tax which is equal to MEC at the Pareto-efficient outcome Q*. (Ibid.)
As shown above the policy with environmental taxes has the benefit that it is economic efficient at the same time as it solves the problem with too much emissions. However there are some practical problems occurring in environmental taxation:
• Cross-border issues: How to solve the pollution problem internationally? A country can not “tax” pollution from abroad.
MEC
tax MNPB−
* t Benefit
Cost /
* Q Q
MNPB Q1
• Goal fulfillment: In theory we will end up in an efficient point (Q*) but in reality the impact of the tax on emissions is more uncertain.
• Inflation issue: The tax has to be adjusted continuously in accordance with the inflation.
• The environmental valuation: The environment has to be valued in monetary terms.
(See chapter 3.4 for more information about environmental valuation and its methods.)
• The assumptions: This taxation model assumes pure competition, well-defined property rights and perfect information, including the information about the MEC- and MNPB-curves. (Pearce & Turner, 1990)
3.2.3 Tradable Permits
With the purpose to combine the advantages with taxes (economic efficiency) and regulations (goal fulfillment) a system with tradable pollution permits has been introduced as a combination of both a market solution and a policy solution of environmental problems. The fundamental idea of tradable permits is that the government decides how much each market should be allowed to pollute. Then a firm in every single industry is given permits to pollute (the total outcome of all permits is the optimal pollution quantity, Q* in figure 3.3). The agents can sell and buy permits as they wish without governmental involvement and accordingly a market for the permits is going to be established. (Ibid.)
Figure 3.4 Market Equilibrium for Tradable Pollution Permits Source: Pearce & Turner, 1990.
Agents to the left of the supply curve (S) will buy permits since their demand is higher than the equilibrium price, P*, and firms to the right of the supply curve are going to sell their permits since they will profit maximize by lowering their production (and decrease waste) or abate emissions (if MAC<MNPB). (Ibid.)
Number of permits D
Price
* P
S
Tradable pollution permits generate, as we have seen, both economic efficiency and a secure goal fulfillment. Since the system is Pareto-optimal it also gives the firms the same incentives as taxes to technological progress. There are at least three more advantages with this kind of system: 1) new firms can enter the market without impacting the markets total waste, 2) non- polluters (e.g. environmental organizations such as Greenpeace) can buy pollution permits without having the intention to pollute and 3) supply and demand on the permit market guaranties that the price for the permits is the “true” price hence the government do not have to adjust the price in line with inflation. (Pearce & Turner, 1990)
However there are a few problems with the tradable permits system: 1) it is hard to establish a functioning market for the permits, 2) the administration cost of the system may be high and (3) so called “hot spots”, i.e. many polluters in a small area, may occur. (Ibid.)
3.2.4 Subsidies
A subsidy is a government solution that aims to give the firms a positive economic incentive to reduce emissions. In practice the government provides one unit subsidy for each unit emitted below a certain standard. (Ibid.)
Figure 3.5 Introducing a Subsidy Source: Pearce & Turner, 1990.
When a subsidy is introduced the government pays firms who pollute below the prescribed level. As the firm gets paid for the production, the average cost curve will shift down (AC→AC-S). Thus in the example above the marginal cost curve will shift upwards (MC→MC+S) since the subsidy is a lost revenue if production increases. In this case the introduction of the subsidy will lower the firms production (Q*→Q1) in the short run. Thus
The Firm The Market
D MC+S
MC AC AC-S
1 q*
q
S1
S0
Q0 Q1 P0
P1
q Q
P P
the firm will be able to do supernormal profits at this stage. These supernormal profits give potential entrants incentive to enter the market. When firms enter the market the market supply will increase (S0 → ), thus the equilibrium quantity will rise (S1 Q0 →Q1) and the price will fall (P0 → ). In this case the long run effect of the subsidy is the opposite from P1 the purposed one since the markets total quantity increased instead of decreased. Thus the emissions may also increase in this case. (Pearce & Turner, 1990)
The long run response from subsidies is very different and uncertain. Among economists subsidies are not that popular because of the risk of altering the entry and exit conditions in a way as was illustrated in the above example. (Ibid.)
3.3 Valuing the Environment
In order to measure the externalities and the effect of the government policies it is necessary to put a monetary value on the environmental good and the change in value due to the external effect. Specifically there are two political reasons for valuing the environment: 1) ex-post valuation, i.e. evaluate realized environmental policies, and 2) ex-ante valuation, i.e.
estimations used when taking political decisions on public investments. (Perman et al., 1999)
Assume an individual that derives utility from two factors, Q and Z, where Z represents environmental goods and Q represents all other consumption possibilities available to the individual. The individuals’ utility function can then be written as
) , (Q Z f
U = (3.1)
A positive change in Z or Q will have a positive effect on the utility (U). Also assume that Z is a collective good that is non-exclusive and non-divisible. Given this, consider a project that causes a significant negative change in Z (i.e an external cost), e.g. ozone-depletion that causes a fall in crop yields. (Ibid.)
(a) (b)
Figure 3.6 Compensating Surplus (CS) and Equivalent Surplus (ES) Source: Sundqvist & Söderholm, 2002.
Above is the environmental change as an externality illustrated (Z0 →Z1). Starting with the left figure (a), we are initially in the point where U is equal to0 Z . Now the actual project 0 that decreases Z to 0 Z1 is considered. If the project will be realized then the compensating surplus (CS) measures the minimum compensation, in terms of Q, that a person is willing to accept to get less Z. As the figure shows CS is derived by keeping utility constant at the new relative price. (Perman et al., 1999)
In the CS case the reference point is the situation before the welfare change, when measuring ES in figure 3.6 (b) the situation is the opposite, i.e. we use the situation after the change as a reference point. The equivalent surplus (ES) then measures how much a person at a maximum are willing to pay, in terms of Q, to get back to the initial quantity of Z. Keeping the former relative price at the new value of utility (U1) gives the ES value. (Ibid.)
3.4 Environmental Valuation Methods
This section aims to describe different economic valuation techniques that can be used for estimating the value of environmental goods and also the CS and ES value. Environmental economists usually make a distinction between two main environmental valuation methods used in order to estimate the demand for environmental goods; revealed preference methods and expressed preference methods. Revealed preference methods approach is indirect since this methods use the demand for a complementary- or a substitute good as a reference when deriving the demand curve. Commonly used indirect methods are the Hedonic Price Method
U0
Z0
Z1 Z
Q
ES
Z1
U1 0
U Z Q
Z0
CS
(HPM) and the Travel Cost Method (TCM). The expressed preference methods have instead a direct approach and create hypothetical markets by asking individuals about their willingness to pay (WTP) or willingness to accept (WTA). Examples of expressed preference methods are Contingent Valuation Method (CVM) and Stated Preference Methods (SPM). (Garrod &
Willis, 1999)
3.4.1 Revealed Preference Methods
The HPM is a revealed preference method that illustrates the basic idea of these indirect valuation techniques. HPM assumes that housing prices provide information about the environmental quality in the neighborhood. HPM aims to separate the effect of the environment in the housing prices, i.e. evaluate how much the housing prices will change when the environmental conditions are changed. (Ibid.)
P=α1+α2 +α3...+αn (3.2)
Equation 3.2 shows the theoretical derivation of a housing price, P. α1 represents for example the size of the house, α2 represents the distance to a supermarket and α3 reflects the environmental quality (air quality, water quality, the distance to the sea etc.). The HPM derives the demand for an environmental good by trying to separate the variable reflecting the environment (α3) from the other variables, i.e. how will a change inα3 affect P. (Ibid.)
Revealed preference methods have the advantage that the market that is analyzed exists and we do not have to create a hypothetical market. Thus the indirect approach only covers the user value of a good. A good may also have an existing value, i.e. the good may give individuals utility without usage. The method may also cause econometric problems. (Ibid.)
3.4.2 Expressed Preference Methods
The Contingent Valuation Method (CVM) is an example of a direct approach that involves asking individuals about their hypothetical WTP and WTA for environmental goods. The main use for CVMs are according to Perman et al. (1999) to “provide inputs to analyses of changes in the level of provision of public goods/bads, and especially of environmental
‘commodities’ which have the characteristics of non-excludability and non-divisibility”.
Compared to the revealed preference methods the direct methods have the advantage to
include both user- and non-user values, i.e. the total economic value of a good. However the fact that the methods deal with hypothetical markets, and not existing ones, may cause a problem. It is impossible to evaluate if there is a difference between the “real” WTP/WTA and the estimated WTP/WTA. There are also a few potential problems with biases using CVM3. (Perman et al., 1999).
3.5 Summary
Negative externalities from emissions is a common problem in markets with environmental goods. In order to include the external costs in the market price environmental taxes can be used. There are two main groups of environmental valuation methods; revealed preference methods, i.e. using the market for a complementary or a substitute good to value the environmental good, and expressed preference methods, i.e. asking individuals about their WTP or WTA for the environmental good. Using an optimal Pigovian tax means trying to set the tax equal to the external cost at the optimal production/consumption point (see figure 3.3).
3 For further reading about biases problems see Garrod & Willis (1999).
Chapter IV
COST AND BENEFITS FROM TAXING OZONE DEPLETING SUBSTANCES
As shown in chapter three there are several policies available trying to regulate emissions.
The Montreal Protocol on Substances that Deplete the Ozone Layer does not recommend any certain policy; every country can choose a policy that the government finds best for their country. Many countries decided to use a regulatory system in order to reduce the production of ODS, while other countries preferred a market-based system, i.e. taxes or tradable permits.
In the US the government initially decided to use the latter and in 1989 a tradable permit system was introduced. However this system was only in use for one year, in 1990 a change to a tax system took place. The purpose of the change was to “serve both to control windfall profits and also to provide an incentive to reduce the amount of production of ozone-depleting chemicals below the levels allowed by the EPA4 regulations”. Thus the tax constitutes a key component of the US ozone protection policy. (Hoerner, 1995)
4.1 The US Taxation of ODS
According to economic theory on taxes (see chapter 3.2.2) the goal with an environmental tax is to make the net price equal to the gross price plus the external cost. In other words, the purpose with a Pigovian tax is to design it to be equal to the social cost that occurs in the production/consumption of the good. In practice it is almost impossible to design a tax in this way and the ODS tax is no exception. According to Barthold (1994) the ODS tax was based primarily on a revenue target, i.e. the tax was designed to maximize the government income, rather than being set equal to the external social cost of the production of ODS. “There is no evidence that the base rate of tax, $1.37 per pound in 1990, in any way reflected the environmental harm posed by these chemicals” (Barthold, 1994). According to Hoerner (1995) the value of the environmental damages probably are much higher than the tax rate.
The ODS tax may not be optimal but it is however differentiated, i.e. the substances are taxed based on how much they harm the ozone layer. When the tax was introduced each chemical
4 Environmental Protection Agency.
was given a value between 0.1 and 10.0 depending on their ozone depleting potential (ODP).
The reference point when estimating this value was CFC-11s ODP which was set at 1.0. In the table below the taxed substances and their ozone depleting potential value are shown.
Note that most substances nowadays are phased out (see table 2.1). (Hoerner, 1995)
Table 4.1 The ODS and their ODP.
Common name Chemical Nomenclature Ozone Depleting Potential
CFC-11 trichlorofluoromethane 1.0
CFC-12 dichlorodifluoromethane 1.0
CFC-113 trichlorotrifluoroethane 0.8
CFC-114 1,2-dichloro-1,1,2,2,-tetra-
fluoroethane 0.6
CFC-115 chloropentafluoroethane 0.6
Halon 1211 bromochlorodifluoromethane 3.0
Halon 1301 bromotrifluoromethane 10.0
Halon 2402 dibromotetrafluoroethane 6.0 Carbon tetrachloride tetrachloromethane 1.1 Methyl chloroform 1,1,1-trichloroethane 0.1 CFC-13, CFC-111,
CFC-112, CFC-211, CFC-212, CFC-213, CFC-214, CFC-215, CFC-216, CFC-217
- 1.0
Source: Hoerner, 1995.
Both domestically produced and imported substances are taxed. However exported ODS are rebated. That is because the tax is designed in accordance with the destination principle, i.e.
the tax is paid in the country where the good is consumed. Hoerner (1995) argues that the reason for the application of this principle is 1) to avoid the movement of the production to other countries and 2) to tax imported ODS in the same way as domestically manufactured ODS. However this principle may reduce the environmental benefit from the tax since agents in a country that does not have a ODS -tax do not have to pay for the externality.
The tax on the production of ODS is calculated by multiplying three values: the number of pounds produced (or imported), the base tax amount per pound and the ozone-depleting potential value. The initial (1990) base tax rate was 1.37 US Dollar but it has been increased frequently. In 1995 the rate was 5.35 US Dollars and in subsequent years it has been added by 0.45 US Dollar annually. Hoerner (1995) argues that “it is probable that this predictable increase in the tax rate is as important to the incentive effect of the tax as the current tax rate,
since it should have a strong effect on the planning process of producers and consumers of ODS”.
4.2 Costs and Benefits from Reducing the ODS-Production
This chapter, which is based on estimates made by ARC for Environment Canada in 1997 and statistics from UNEP (United Nations Environment Programme), will describe the economic costs and environmental benefits from reducing the production of ODS. This is essential to the empirical framework since these factors are fundamental for the forthcoming calculation of the net benefit from the US-tax of ODS. All effects have been estimated using “the best quantitative estimates possible given the current level of knowledge”. However uncertainties remain and the estimations should be “interpreted as indicative of the health effects avoided by the Montreal Protocol”. (ARC, 1997)
4.2.1 Costs from Substituting ODS
ARC defines the cost of substituting from ODS to non-ozone-depleting substances as “the additional quantity of resources needed to produce this constant level of output” (Ibid.). Of the total amount of the worlds 1,492.8 ozone-depleting potential units in 1986 CFCs was the main contributor by 1,065.0 units or about 71 percent. However in the US, and in many other developed countries, CFCs was already banned in certain industries (e.g. sprays) in the late 1970s or in the early 1980s. Thus the costs of substitution were relatively low in these countries since the ban already had reduced the quantities of CFCs. It had also provided a technical knowledge in the use of substitutes (e.g. hydrocarbon).
In order to give the reader a comprehensive summary of how substitution costs were calculated a summary of the methodological framework used by ARC when estimating the costs of the substitution of CFCs will follow below.
1. Identifying conversion approaches (A) and adjustments by firms in each industry (e.g.
refrigeration and air conditioning sector). (A1,A2...An)
2. Evaluate and determine the cost per kilogram of CFCs (C1,C2...Cn) that is substituted by using published data and industry estimates.
3. Estimate the number of kilograms replaced in a single industry. (Q1,Q2...Qn) 4. Calculate the total cost of the industry. (CA1*Q1+CA2*Q2...+CAn *Qn)
Table 4.2 Estimated costs of replacing ODS 1987-2060 in units of billion of 1997 US Dollars.
Global Costs (including the US)
Estimated Costs for the US
CFCs 128.0 23.97 Halons 12.6 4.12
HCFCs 33.1 13.70
Methyl Chloroform 47.8 16.73
Carbon Tetrachloride 5.7 0.20
Methyl Bromide 7.8 3.06
TOTAL 235.0 61.78
Source: ARC, 1997 (Global Costs) and UNEP, 2000 (US Costs).
Table 4.2 shows the estimated costs of reducing ODS in accordance with the requirements of the Montreal Protocol in the period of 1987-2060. The reason for choosing this time period is that the Montreal Protocol was signed in 1987 and the ozone layer is estimated to recover to its pre-1970 ozone-concentration by 2060, given that the plan for the Montreal Protocol is realized. The values in the right column (Estimated Costs for the US) are based on statistics from UNEP. The US share of all developed countries production of each substance has been calculated by the base year, i.e. the year before an international agreement of regulating the production of the substance5. The estimation is based on two scenarios, the no-control scenario and the scenario of the Montreal Protocol controls. The production the years after the base year is influenced by the Montreal Protocol controls. The latter is the real scenario and the former is a hypothetical comparable scenario. Years before the base year do not illustrate the production share in a satisfactory way since the production is affected by the Montreal Protocol these years. Furthermore the value of the US share of the production of each substance has been multiplied by the total cost of replacing the substance for all developed countries. This means that the calculation assumes that the US’ replacement cost is the same as the mean replacement cost for all developed countries. The replacement costs for e.g. CFCs are also different depending on the area of use. Furthermore the calculations also assumes that the US’ area of use is the same as the mean ditto for the developed countries. For further information about the US total replacement cost see Appendix A.
5 The base year is 1986 for CFCs and Halons. For Carbon Tetrachloride, Methyl Chloroform and HCFCs the base year is 1989. The base year for Methyl Bromide is 1991.
To sum up this section of the chapter, the US has increased its costs by about 61.78 billion 1997 US Dollars over the time 1987-2060 by replacing ODS.
4.2.2 Benefits from Substituting ODS
ARC divides benefits from substituting ODS into two main groups, health effects and non- health effects. The health effects are then divided into three groups: non-melonama skin cancer, melonama skin cancer and eye injuries (cataracts). These effects are measured in cases and fatalities (not US Dollars) and are shown in table 4.3.
Table 4.3 Health benefits from reducing the production and consumption of ODS in accordance with the Montreal Protocol 1987-2060
Health Benefits Reduced Cases Reduced Cases of Non-Melonama
Skin Cancer
19,100,000 cases
Reduced Cases of Melonama Skin Cancer 1,500,000 cases Reduced Cases of Cataracts 129,100,000 cases Reduced Skin Cancer Fatalities 333,500 fatalities6
Source: ARC, 1997.
The above estimations are made using a model that determines the effects on human health when increasing the UV-radiation. ARC have estimated the difference between the scenario under the Montreal Protocol and the fictive non-regulation scenario. Cancer incidence rates are estimated from a regression model using data from cancer registries controlling life expectancy, economic development, skin colour, latitude and religious practices pertaining to clothing. The data on eye-injuries are from American Academy of Ophthalmology (Cataracts), data on melonama skin cancer are from the 1994 UNEP Environmental Effects Panel Report and population data are from World Bank and the US Central Intelligence Agency. (ARC, 1997)
“A degree of uncertainty exists with all calculated values” however the estimates shows that
“the health effects avoided through the Montreal Protocol remain substantial”. The estimations on reduced cases of cataracts and reduced skin cancer fatalities are the mean value of a determined interval (58.2 million to 200 million on cataracts and 171,000 to 496,000 on
6 19,000 fewer deaths from non-melonama skin cancer and 152,000 fewer deaths from melonama skin cancer.
deaths from skin cancer). All health effects seem to increase progressively over time. For example extending the non-melonama skin cancer analysis to 2070 would add more than 10 million additional cases, i.e. more than 50 per cent increase. (ARC, 1997)
The non-health effects from avoiding the depletion of the ozone layer have also been identified. These effects are as well divided into three groups by ARC; fisheries effects, agricultural effects and material effects. The non-health effects are shown in the below table.
Table 4.4 Non-health benefits in billion of 1997 US Dollars of reducing the production and consumption of ODS in accordance with the Montreal Protocol 1987-2060.
Non-Health Effects Dollar Benefits in 1997 billion US Dollars
Reduced Fisheries Damage 238 Reduced Agricultural Damage 191 Reduced Damage to Materials 30 Total Dollar Benefits 459
Source: ARC, 1997.
The above data, calculated by ARC, measure effects affecting the human welfare indirectly.
These effects are, according to ARC, more difficult to estimate. The above effects are just a selection of all non-health effects. Thus the estimated effect may be a minimum non-health benefit from reducing the use of ODS. The reduced fisheries damage is an effect from reducing the decrease of phytoplankton which is at the very bottom of the aquatic food chain.
Agricultural damage comes from the fact that increased UV-radiation decrease yields (e.g.
soybeans). Increased ozone-depletion can also, according to ARC, have a significant negative impact on materials, e.g. plastics, paints and other materials used in outdoor applications.
However this benefit is, as shown in table 4.4, fairly low. (Ibid.)
4.3 The Estimated Net Benefits from the US Tax on ODS
In order to fulfill the purpose of the thesis this chapter aims to separate the costs and benefits to the US from the reduction of ODS. Table 4.5 summarize the estimated data over global benefits and costs from tables 4.2-4.4.
Table 4.5 Net Global Benefits from phasing out ODS in units of billion 1997 US Dollars.
Global Dollar Benefits 459
Global Dollar Costs 235
Global Dollar Net Benefit 224
Source: ARC, 1997.
The global net benefit from phasing out ODS in accordance with the Montreal Protocol is as shown 224 billion 1997 US Dollars. This means that each dollar spent on costs related to reduce the ODS production and consumption will give 1.95 US Dollars back since
459/235=1.95 (4.1)
Assuming that the US payback is the same as the global mean ditto the US benefit from phasing out ODS can be calculated as
1.95*61.78=120.47 (4.2)
Thus the US net benefit is approximately
120.47-61.78=58.69 (4.3)
However this net benefit is a consequence of both the regulation and the ODS tax. Separating the effect of just the tax has not been done in existing studies but Hoerner (1995) concludes that the tax has contributed to a substantial reduction of the use of ODS. “The ozone-depleting chemicals tax is probably responsible for reducing the production of those chemicals below the amount allowed under the caps, it does not follow that the caps had no effect” (Hoerner, 1995). Thus it is, given existing studies, almost impossible to separate the effect caused by the tax from the total effect in a satisfied way. However Hoerner (1995) argues that “290 thousand tonnes would appear to be the lower boundary of the environmental benefit
attributable to the tax” and “this amount is 126 per cent of the difference between the caps and the business-as-usual projection” (i.e. the no-control scenario). Given this the environmental benefit of the ODS tax is approximately 56 per cent of the total change.7
58.69*0.56=32.87 (4.4)
The health effects attributed to the tax can be estimated in the same way. The results of these calculations are shown in the below table. The calculations follow in Appendix B.
Table 4.6 Health benefits from the US-tax on ODS
Health Benefit Reduced Cases Reduced Cases of Non-Melonama
Skin Cancer 2,812
Reduced Cases of Melonama Skin Cancer 221 Reduced Cases of Cataracts 19,006 Reduced Skin Cancer Fatalities 49
Source: Own construction.
Combining the studies of Hoerner (1995) and ARC (1997) in this way gives the rough net result of the US-tax on ODS to be at a minimum of 32.87 billion of 1997 US Dollars.
Additionally 2,812 reduced cases of non-Melonama skin cancer, 221 reduced cases of Melonama skin cancer, 19,006 reduced cases of cataracts and 49 reduced deaths from skin cancer can be constituted to the US ODS tax. However this value is a general estimation made by combining the two studies. The value is in no way exact but it seems to be, to quote Hoerner (1995), “the lower boundary of the environmental benefit attributable to the tax”.
One must remember that the used method to combine these two studies assumes 1) the US costs to be equal to the mean costs of phasing out ODS in all developed countries, 2) the US area of use to be the same as the mean ditto for developed countries, 3) the US rate of investment (ROI) of replacing ODS is the same as the mean global ROI (195 per cent) and 4)
7 If 290 thousand tonnes constitutes 126 per cent of the difference between the no-control scenario and the regulation then the difference between these scenarios is 290/1.26=230 thousand tonnes. The difference between the no-control scenario and the regulation plus the difference between the regulation and the tax is then equal to 520 (290+230) thousands tonnes. Thus the regulation constitutes 230/520=0.44, i.e. 44 per cent, and the tax constitutes 290/520=0.56, i.e. 56 per cent, of the total difference.
the tax affects the replacement of ODS in the same way from 1987 until the substances have been completely replaced8 as it did in the period of Hoerners’ study (1990-1995).
Summarizing the taxation of ODS one can mention that before the tax was introduced the rest of the world was achieving less rapid growth or more effective reductions in the use of ODS than the US. However after the introduction of the tax the situation was reversed (Hoerner, 1995). Hoerner (1995) concludes that “the history of the ozone-depleting chemicals tax establishes beyond reasonable doubt that tax instruments can be a powerful tool for environmental protection”. The ODS tax has shown that the theoretical framework on environmental taxes can work in reality since “by stimulating innovation and allowing a flexible response, environmental taxes in effect balance economic and environmental risks, causing large reductions where they can be cheaply achieved but allowing a smaller response when technically feasible alternatives are more costly” (Ibid.).
8 Most substances are phased out in developed countries now (2003). However the production and consumption of HCFCs and Methyl Bromide will continue in some certain industries in a strictly way until 2030 respectively 2005 (see table 2.1).
Chapter V
CONCLUSIONS AND DISCUSSION
The Montreal Protocol on Substances that Deplete the Ozone Layer seems to be a successful example in the international environmental co-operation. The main reasons of this success seems to be 1) the collective description of the good, i.e. the ozone layer, and 2) the large and obvious positive net result from phasing out ODS (The Economist, 2003). Because of these two reasons the parties have incentives to co-operate in a satisfactory way. Thus free riders easily can be punished in order to minimize the incentive to cheat. Giving the developing countries more time to phase out these substances than the developed ones, i.e. letting the rich pay more than the poor, seems to be another reason of the success of the Montreal Protocol.
The US tax of ODS seems to be a successful national method of reducing the use of ODS substantially. The estimations in chapter four shows that the net benefit from the tax is at least 32.87 billion 1997 US Dollars, 2,812 reduced cases of non-melonama skin cancer, 221 reduced cases of melonama skin cancer, 19,006 reduced cases of cataracts and finally 49 reduced fatalities from skin cancer. There was a problem separating the effect from the tax from the total effect. However a minimum of 56 per cent of the total effect seems to be caused by the tax. This according to Hoerner (1995) which argues that “because the caps have never been the binding constraint, it is probable that much of the observed reduction would have occurred even without the caps” and “it is not completely certain that the caps had any impacts”. Thus these values should be seen as approximate estimations and not exact ones.
However the main conclusion of this result is that there is an obvious positive net result in the US from reducing the ODS in accordance with the Montreal Protocol by using the tax tool.
Since the replacement of ODS seems to have been fairly successful not just in the US but also in most other countries it seems to be reasonable to suppose that the net result are positive also in these countries.
The estimations made by ARC have used a variant of a revealed preference valuation method, i.e. the good (the ozone layer) is valued during analyzing markets for a complementary good (e.g. the fish stock and crop yields). Thus ARC assumes that the price of fish and soybeans
depend on the ozone concentration in the stratosphere. Since there is a obvious negative relation between the supply of fish and soybeans and the depletion of the ozone this assumption is surely fulfilled. However there are a few general disadvantages occurring when using this type of methods and this environmental valuation is no exception since ARC have not solved these problems. First, the method only covers the user value of a good. The user value is the direct value of consuming a good that can be priced in a market (e.g. the market for fish). However this value is only a part of the total value of a good since it may also have an existing value, i.e. the good may give individuals utility without usage. Using this method the fish in the oceans do not have any value for people that do not eat fish. The conclusion of this discussion is that it is reasonable to assume that ARC have underestimated the value of the Dollar benefits from replacing ODS. Secondly the method may cause econometric problems but since ARC do not discuss this in their study it is impossible to know weather this is the case here.
According to the empirical framework it seems to be pretty clear that the estimation of the environmental benefit from taxing ODS in the US is at the lower boundary of the total effect.
Even if most indicates that this is the case there is at least one contradiction to this statement.
This is the problem of an international black market on ODS and the fact that the US has become the main target for this illegal trade. However both the US and the EU in subsequent years have succeeded to decrease the smuggling through more controls and tougher penalties.
Thus in the future the developing countries may be the states that will have the most serious problems with the illegal trade of ODS. In fact the phase-out schedule for these countries are threaten by the smuggling. (EIA, 2003)
To summarize, there is a lot of uncertainty about the effects of the Montreal Protocol and the phase-out of ODS. The estimation in the empirical framework seems to be the minimum net benefit from the taxation of ODS in the US. However because of the illegal trade of ODS estimations of the environmental benefits are more uncertain. In spite of all uncertainties it can be established that the benefits from reduce ODS emissions certainly is significantly higher than the replacement costs. Barrett (2003) argues that estimating costs and benefits in these kind of cases is never easy but in the case of the ODS “the basic economics of ozone policy thus implied that , for the United States – and probably for most industrial countries – the benefit of acceding to the Montreal Protocol exceeded the cost by a wide marginal, irrespective of the behavior of other countries”.
Another conclusion of this study is that the US seems to have been one of the countries that have replaced ODS in the most satisfactory way according to the Montreal Protocol. An interesting question is why the US have acted in this way in this case but in the case with the Kyoto Protocol the country have not even ratified the agreement and do not have the intention to ratify it in the future either (e.g. Lindahl, 2002). From an environmental point of view these both protocols seems to be comparable since the external costs in both cases are relatively high and there are substitutes available. A comparison between the US behavior in the environmental agreements in Montreal respectively Kyoto could be a interesting forthcoming study.
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APPENDIX A
Table A.1 Consumption of ODS in 1986 (1), 1989 (2) respectively 1991 (3) in units of ODP tonnes
Substance All Developed Countries
The US The US Share of the Developed
Countries
CFCs (1) 940,888 305,964 32.52%
Halons (1) 172,720 57,803 33.47%
Carbon Tetrachloride (2)
253,044 11,924 4.71%
Methyl Bromide (3) 33,577 15,317 45.62%
Methyl Chloroform (2)
60,570 25,597 42.26%
HCFCs (2) 11,978 6,363 53.12%
Source: UNEP, 2003.
