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The design of optimal climate policy with air pollution co-benefits

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  • Muller, Nicholas Z.

Abstract

This paper develops a model of an optimal regulatory program for greenhouse gases (GHGs) emissions that accommodates the benefits due to reductions of co-pollutants including: sulfur dioxide (SO2), nitrogen oxides (NOx), volatile organic compounds (VOC), and fine particulate matter (PM2.5). Employing per ton damage estimates for the co-pollutants produced by an integrated assessment model, co-pollutant damage estimates per ton carbon dioxide equivalent (CO2e) are developed for over 10,000 sources of GHGs in the lower 48 states including both transportation sources and electric power generation. For coal-fired electric power generation, the co-pollutant damages are larger in magnitude than recent peer-reviewed estimates of the marginal damage for GHGs. The co-pollutant damage per ton CO2e varies considerably across source types and source location. The paper estimates the welfare gain from adopting a policy that encompasses the spatially variant co-pollutant damage to be between $1 million and $85 million annually. The range depends on the slope of the marginal abatement cost curve. The paper also shows that a distortionary aggregate emission cap reduces the advantage of differentiated policy. Provided an excessively strict cap, the spatially differentiated policy may reduce aggregate welfare. This result has important implications for GHG policy in the United States; although co-pollutant benefits of abating GHGs have been shown to be significant in magnitude, tailoring climate policy to reflect these source-specific co-benefits is not necessarily socially beneficial. This bolsters arguments for upstream policy designs.

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Bibliographic Info

Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 4 ()
Pages: 696-722

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Handle: RePEc:eee:resene:v:34:y:2012:i:4:p:696-722

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Web page: http://www.elsevier.com/locate/inca/505569

Related research

Keywords: Climate policy; Local air pollution; Electric power generation; Transportation;

References

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  1. Muller Nicholas & Tong Daniel & Mendelsohn Robert, 2009. "Regulating NOx and SO2 Emissions in Atlanta," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(2), pages 1-32, March.
  2. Aldy, Joseph E. & Viscusi, W. Kip, 2007. "Age Differences in the Value of Statistical Life: Revealed Preference Evidence," Discussion Papers dp-07-05, Resources For the Future.
  3. Tol, Richard S. J., 2007. "The Social Cost of Carbon: Trends, Outliers and Catastrophes," Economics Discussion Papers 2007-44, Kiel Institute for the World Economy.
  4. R. Scott Farrow & Martin T. Schultz & Pinar Celikkol & George L. Van Houtven, 2005. "Pollution Trading in Water Quality Limited Areas: Use of Benefits Assessment and Cost-Effective Trading Ratios," Land Economics, University of Wisconsin Press, vol. 81(2).
  5. Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, vol. 99(5), pages 1714-39, December.
  6. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  7. Fraas, Arthur G. & Richardson, Nathan, 2010. "Banking on Allowances: The EPA’s Mixed Record in Managing Emissions-Market Transitions," Discussion Papers dp-10-42.pdf, Resources For the Future.
  8. Michael Hoel & Larry Karp, 1999. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Working Papers 1999.15, Fondazione Eni Enrico Mattei.
  9. Nordhaus, William D., 1993. "Rolling the 'DICE': an optimal transition path for controlling greenhouse gases," Resource and Energy Economics, Elsevier, vol. 15(1), pages 27-50, March.
  10. Johannes Bollen & Bruno Guay & Stéphanie Jamet & Jan Corfee-Morlot, 2009. "Co-Benefits of Climate Change Mitigation Policies: Literature Review and New Results," OECD Economics Department Working Papers 693, OECD Publishing.
  11. Nicholas Z. Muller & Robert Mendelsohn & William Nordhaus, 2011. "Environmental Accounting for Pollution in the United States Economy," American Economic Review, American Economic Association, vol. 101(5), pages 1649-75, August.
  12. Cao, Jing & Ho, Mun & Jorgenson, Dale, 2008. "“Co-benefits” of Greenhouse Gas Mitigation Policies in China: An Integrated Top-Down and Bottom-Up Modeling Analysis," Discussion Papers dp-08-10-efd, Resources For the Future.
  13. Art Fraas & Randall Lutter, 2012. "Efficient Pollution Regulation: Getting the Prices Right: Comment," American Economic Review, American Economic Association, vol. 102(1), pages 602-07, February.
  14. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, December.
  15. Nordhaus, William, 1982. "How Fast Should We Graze the Global Commons?," American Economic Review, American Economic Association, vol. 72(2), pages 242-46, May.
  16. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
  17. Karp, Larry & Zhang, Jiangfeng, 2006. "Regulation with anticipated learning about environmental damages," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 259-279, May.
  18. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120, December.
  19. Garbaccio, Richard F. & Ho, Mun S. & Jorgenson, Dale W., 1999. "Controlling carbon emissions in China," Environment and Development Economics, Cambridge University Press, vol. 4(04), pages 493-518, October.
  20. Muller Nicholas Z, 2011. "Linking Policy to Statistical Uncertainty in Air Pollution Damages," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-29, June.
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Cited by:
  1. James Boyce & Manuel Pastor, 2013. "Clearing the air: incorporating air quality and environmental justice into climate policy," Climatic Change, Springer, vol. 120(4), pages 801-814, October.

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