Los Angeles, Mexico City, Cubatao, and Ankara - Efficient environmental regulation : case studies of urban air pollution

The authors review the economic principles that should guide the efficient choice of targeted policies for environmental protection. They recommend policy instruments along three dimensions: (1) whether they use economic incentives; (2) whether they target environmental damage directly; and (3) whether they specify prices, quantities, or technologies. This distinction is helpful in guiding policy choices because many discussions in the economics literature on environmental policies mistakenly claim advantages for incentive-based instruments by showing, for instance, that direct policies of this sort are less costly than indirect non-incentive measures. After analyzing efficient responses to the air pollution problem, the authors come up with somewhat surprising results. For three of the cities (Ankara, Los Angeles, and Mexico City), the efficient instruments selected by this (admittedly limited) exercise are similar: indirect incentive-based policies. Only Cubatao differs in that direct non-incentive regulations are the efficient policy choice. But choosing indirect policy instruments is not without its problems. This category is the broadest one. For instance, while there is only a single direct incentive-based price instrument (emissions taxes), several indirect incentive-based price policies exist including taxes on inputs and on complementary and substitute products. Indirect policies also cannot simultaneously target the incentives to reduce waste generation, production efficiency, and reduce output to reduce pollution. A combination of indirect policies will then be required to control pollution. But if the regulatory costs of controlling additional variables are high they may outweigh the cost of monitoring and enforcing a single direct policy. Finally, indirect regulations may be accompanied by perverse incentives, such as new source bias or reduced marginal costs of polluting. Efforts to offset these perverse incentives by regulating additional variables may be subject to second-best problems: two regulations with opposite results can be costlier than no regulation at all. The main lesson the authors draw from the cases examined: Once decisions are made - whether to concentrate industry, to rely on private vehicles for transportation, to subsidize a particular energy source, or to use a certain environmental policy - they acquire a certain performance. Capital is invested and workers are trained under the prevailing laws, and these are costly to change. Los Angeles cannot reverse its emphasis on the automobile; Brazil cannot easily move its industrial center away from Cubatao; Mexico cannot quickly reduce the concentration in its capital city; and Turkey's development would suffer if energy subsidies were removed abruptly. For this reason, it is important to design policy with an eye toward longer-run concerns. It makes sense, for example, for cities such as Ankara to begin to enact policies to prevent mobile source pollution from worsening over the next decades. The authors also point out the dangers of ignoring intermedia substitution of pollutants. In places such as Cubatao, where air quality has been cleaned up, the improvement may have come at the expense of water quality or the accumulation of hazardous wastes.