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Energy pricing and air pollution : econometric evidence from manufacturing in Chile and Indonesia

Listed author(s):
  • Eskeland, Gunnar S.
  • Jimenez, Emmanuel
  • Lili Liu
  • DEC

Sound public policy addresses externalities directly, when possible. Air pollution is best alleviated by policy instruments that internalize the social cost of pollution, making it attractive to reduce emissions. One such instrument might be a tax levied on individual emissions, if they are measurable and if there is an accepted relationship between emissions and the damages to society. But such first-best solutions may not be feasible for many reasons, among them the cost of implementation. When first-best instruments are unavailable, indirect instruments, such as presumptive taxing of polluting inputs, may be a powerful alternative. Energy pricing is, for air pollution, one such indirect instrument. Energy pricing policies affect emissions through fuel substitution and energy conservation. The authors provide an empirical framework for measuring the magnitude of this impact and apply it to two cases: manufacturing in Chile and Indonesia. They find that: 1) the responsiveness of emissions makes energy prices a powerful indirect tool for reducing emissions; 2) there is room for substitution toward cleaner input combinations - both toward cleaner fuels and away from energy, toward labor, capital, and materials; 3) substitution toward cleaner fuels can also be induced without increasing energy prices generally, by increasing the price of the dirtier fuels, thereby reducing the relative price of the cleaner ones. But noncompensated price increases for the dirtier fuels, plus increases for all fuels, will be more powerful since they will also induce firms to reduce their overall energy use. In exploiting interfuel substitution, it is important to assess the relative damage caused by different pollutants. In Indonesia, increases in coal prices could deliver reductions in particulate emissions, but in Chile they would not, because of a small own-price elasticity, a heavily-used source of energy that also produces particulate emissions. Higher prices for pollution-laden fuels will generally reduce demand, as expected, but the net effect on emissions will depend on: a) whether other fuels laden with the same pollutants are spared such price increases; b) whether their cross-price elasticities are positive; and c) which fuel shares are high.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1323.

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Date of creation: 31 Jul 1994
Handle: RePEc:wbk:wbrwps:1323
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  1. Anwar Shah & Bjorn Larsen, 2014. "Carbon taxes, the greenhouse effect, and developing countries," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 353-402, May.
  2. Kate, Adriaan Ten, 1993. "Industrial development and the environment in Mexico," Policy Research Working Paper Series 1125, The World Bank.
  3. Lee, Lung-Fei & Pitt, Mark M., 1987. "Microeconometric models of rationing, imperfect markets, and non-negativity constraints," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 89-110.
  4. Bacon, Robert, 1992. "Measuring the possibilities of interfuel substitution," Policy Research Working Paper Series 1031, The World Bank.
  5. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-268, August.
  6. Kopp, Raymond J., 1992. "Economic incentives and point source emissions : choice of modeling platform," Policy Research Working Paper Series 920, The World Bank.
  7. Moss, Diana L & Tybout, James R, 1994. "The Scope for Fuel Substitution in Manufacturing Industries: A Case Study of Chile and Colombia," World Bank Economic Review, World Bank Group, vol. 8(1), pages 49-74, January.
  8. Jorgenson, D.W. & Wilcoxen, P.J., 1991. "Reducing US Carbon Dioxide Emissions: The Cost of Different Goals," Harvard Institute of Economic Research Working Papers 1575, Harvard - Institute of Economic Research.
  9. John Whalley & Randall Wigle, 1991. "Cutting CO2 Emissions: The Effects of Alternative Policy Approaches," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 109-124.
  10. Fuss, Melvyn A., 1977. "The demand for energy in Canadian manufacturing : An example of the estimation of production structures with many inputs," Journal of Econometrics, Elsevier, vol. 5(1), pages 89-116, January.
  11. Ostro, Bart, 1994. "Estimating the health effects of air pollutants : a method with an application to Jakarta," Policy Research Working Paper Series 1301, The World Bank.
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