Group Assignment

On
Natural Resource and Environmental Economics (Econ-2092)

Group Members:
1. Desta Kidanu CBE/UE207/05
2. Habtamu Worku CBE/UE167/04
3. Mahmud Abadr CBE/UE 013 /06
4. Binyam Hagos CBE/UE003/06
5. Gikrstos Hagose CBE/UE/05/06
6. Kulubrahan Meressa CBE/UE/011/06
7. Mahmud Abadr CBE/UE/013/06
8. Solomon Abraha CBE/UE/015/06

Submitted to: Geletaw A.

Department of Economics
College of Business and Economics
Mekelle University

June, 2015
Mekelle
1. Discussion about environmental policy instruments and criteria for choice of pollution
control

Environmental issues are recent issues in our world; they revolve around deforestation, soil erosion, air
and water pollution, acidic rain, ozone layer depletion, and global warming, etc. Hence, pollution is one
of the environmental problems. To tackle such pollution problems, the Ethiopian government has enacted
different laws in relation to environment. For example, through its proclamation number 295/2002, it has
established Environmental Protection Organ; through its proclamation number 300/2002, the country
enacted environmental pollution control; through its proclamation 159/2008, the country enacted
regulation on environmental pollution control; through its Proclamation No. 299/2002, Environmental
Impact Assessment Proclamation was enacted; through its proclamation No. 513/2007, Solid Waste
Management Proclamation was enacted. In fact, the rights and obligations of the Environmental
Protection Authority reestablished under Proclamation No. 295/2002 are hereby transferred to the
Ministry of Environment and Forest through proclamation no. 803/2013 a proclamation. All the above
proclamations, but not limited, show that our country has laws that are designed to protect the
environmental problems, like pollution.
This question has two parts: (1) pollution control instruments, and (2) criteria to choose the pollution
control instrument.

a. Pollution control instruments

As stated by Perman, Ma, McGilvray, and Common (2003:207), the pollution control instruments are
divided in to three major groups: (1) Institutional approaches to facilitate internalization of externalities;
(2) Command and control instruments; and (3) Economic incentive (market-based) instruments. Each
instrument has sub-instruments; for details, you can refer the following table.

Table-1: list of Instruments for pollution control

Instruments Sub-instruments
1. Institutional approaches to  Facilitation of bargaining
facilitate internalization of  Specification of liability
externalities  Development of social responsibility
2. Command and control  Input controls over quantity and/or mix of inputs
instruments  Technology controls
 Output controls:
 Output quotas or prohibitions
 Emissions licenses
 Location controls (zoning, planning controls,
relocation)
 Instruments Sub-instruments
3. Economic incentive (market-  Emissions charges/taxes
based) instruments  User charges/fees/natural resource taxes
 Product charges/taxes
 Emissions abatement and resource management
subsidies
 Marketable (transferable, marketable) emissions
permits
 Deposit-refund systems
 Non-compliance fees
 Performance bonds
 Liability payments

The instruments are applicable to the Ethiopian context too. For example, to control the pollution in
Ethiopia, the government has put the maximum level of discharge of emission for leather and textile
industries; you can refer the following two tables. For further reference, please refer the attached
appendix which revolves about the types of activities and their standards.

Table 2: Tanning and leather finishing emission standards

(a). Limit Values for Discharges to Water

Parameter Limit Value

Temperature 40 °C

pH 6–9

BOD5 at 20°C 200 mg/l

COD 500 mg/l

Suspended solids 50 mg/l

Total ammonia (as N) 30 mg/l

Total nitrogen (as N) 60 mg/l

Total phosphorus (as P) 10 mg/l

Oils, fats, and grease 15 mg/l

Mineral oils at oil trap or interceptors 20 mg/l

Chromium (as total Cr) 2 mg/l

Chromium (as Cr VI) 0.1 mg/l

Chlorides (as Cl) 1000 mg/l

Sulphides (as S) 1 mg/l

Phenols 1 mg/l

(b).Limit Values for Emissions to Air

Parameter Limit value

Total particulates 50 mg/Nm3

Volatile organic carbons 75 g/m2 product produced

Total hydrogen sulphide, sulphides and mercaptans (as S) 5 ppm v/v

Ammonia 40 ppm v/v

Acid vapours (as HCl) 30 mg/Nm3

Source: (EPA, as modified in 2011)

Table-3: Manufacture and finishing of textiles emission standards

(a). Limit Values for Discharges to Water

Parameter Limit Values

Temperature 40 °C

pH 6–9

BOD5 at 20°C 50 mg/l

Total nitrogen (as N) 40 mg/l

COD (mg O2 /l) 150 mg/l

Total phosphorus (as P) 10 mg/l

Suspended solids 30 mg/l

Total ammonia (as N) 20 mg/l

Oils, fats & grease 20 mg/l

Phenols 1 mg/l

Mercury (as Hg) 0.001 mg/l

Nickel (as Ni) 2 mg/l

Cobalt (as Co) 1 mg/l

Lead (as Pb) 0.5 mg/l

Antimony (as Sb) 2 mg/l

Tin (as Sn) 5 mg/l

Chromium (as Cr VI) 0.1 mg/l

Chromium (as total Cr) 1 mg/l

Arsenic (as AS) 0.25 mg/l

Cadmium (as Cd) 1 mg/l

Zinc (as Zn) 5 mg/l

Copper (as Cu) 2 mg/l

Mineral oils (Interceptors) 20 mg/l

Benzene, toluene & xylene (combined) 1 mg/l

Mineral oils (Biological Treatment) 5 mg/l

Organochlorine pesticides (as Cl) 0.03 mg/l

Mothproofing agents (as Cl) 0.003 mg/l

Organophosphorus pesticides (as P) 0.003 mg/l

Absorbable organic halogen compounds (AOX) 5 mg/l

Sulphide (as S) 2 mg/l

(b). Limit Values for Emissions to Air

Parameter Limit value (mg/Nm3)

Particulate matter 50

Volatile organic carbons (as C)

(excluding formaldehyde) 50

Formaldehyde 20

Isocyanates (as NCO) 0.1

Source: (EPA, as modified in 2011)

b. Criteria to choose the pollution control instrument.

The group tried to assess the different types of criteria that are used to select the appropriate type of
pollution control criteria. There is environmental policy in Ethiopian, which comprises the following five
listed components:

 The resource base and the need for a policy

 The policy goal, objectives and guiding principles
 Sectoral environmental policies
 Cross-sectoral environment policies
 Policy implementation

From the literature perspective, we have found about nine criteria that are used to select an appropriate
policy instrument to control pollution; they are Cost-effectiveness, Long-run effects, Dynamic efficiency,
Ancillary benefits, Equity, Dependability, Flexibility, Costs of use under uncertainty, and Information
requirements.

The group tried to check if the nine criteria are used in developing the pollution control instruments;
accordingly, we found that almost all the above listed criteria are used by the Ethiopian government in
setting instruments.

As stated by Perman, Ma, McGilvray, and Common (2003:203), the policy instrument criteria with their
respective brief description are listed as follows:
 Cost-effectiveness: Does the instrument attain the target at least cost?
 Long-run effects: Does the influence of the instrument strengthen, weaken or remain constant
over time?
 Dynamic efficiency: Does the instrument create continual incentives to improve products or
production processes in pollution-reducing ways?
 Ancillary benefits: Does the use of the instrument allow for a ‘double dividend’ to be achieved?
 Equity: What implications does the use of an instrument have for the distribution of income or
wealth?
 Dependability: To what extent can the instrument be relied upon to achieve the target?
 Flexibility: Is the instrument capable of being adapted quickly and cheaply as new information
arises, as conditions change, or as targets are altered?
 Costs of use under uncertainty: How large are the efficiency losses when the instrument is used
with incorrect information?
 Information requirements: How much information does the instrument require that the control
authority possess, and what are the costs of acquiring it?
2. Discussion about properties and relative advantages of various instruments to attain
environmental policy targets

The pollution control instruments are grouped in to three major elements: (1) Institutional approaches to
facilitate internalization of externalities; (2) Command and control instruments; and (3) Economic
incentive (market-based) instruments. Each instrument has advantage in meeting environmental policy
targets.

2.1 Institutional approaches to facilitate internalization of externalities: - this instrument has three sub-
instruments; they are Facilitation of bargaining, Specification of liability, and Development of social
responsibility.

a. Facilitation of bargaining: - in the presence of institutional approaches, cost of, or impediments to,
bargaining are reduced. This happens because polluter information placed in the public domain.
b. Specification of liability: - in the existence of institutions, there is possibility for the codification
of liability for environmental damage.
c. Development of social responsibility:- There is possibility of Education and socialization
programs promoting citizenship when there is an institutional approach. This increases the
awareness and participation of the people in proper management of the environment. This can be
realized by using Energy-conservation media campaigns Environmental labeling.

2.2 Command and control instruments

a. Input controls over quantity and/or mix of inputs: -this enables requirements to use particular
inputs, or prohibitions/restrictions on use of others. This bans on use of toxic cleansing agents.
b. Technology controls: - this tool enforces requirements to use particular methods or standards.
This needs requirement to install catalytic converters in exhausts.
c. Output controls:
i. Output quotas or prohibitions: - this limits non-transferable ceilings on product outputs. This
prohibits use and emission level of pollutants.
ii. Emissions licenses: - It limits on the Non-transferable ceilings on emission quantities.
iii. Location controls (zoning, planning controls, relocation): - The instruments helps in
specifying regulations relating to admissible location of activities. For example, it may state
heavy industry zoning regulations

2.3 Economic incentive (market-based) instruments

a. Emissions charges/taxes: - These are direct charges based on quantity and/or quality of a pollutant.
In the existence of emission charges, polluters will be forced to reduce or avoid their emissions to
the environment. This happens because such charges can be painful to the polluters. In such a way,
 countries may reduce environmental pollution. For example, Ethiopia may set different charges
like air pollution charges like NOX charges in France and Sweden; SO2 charges in France and
Japan; Carbon/energy taxes; Water effluent charges, like evidence of effectiveness in Germany,
Netherlands and Malaysia; Noise pollution charges, like in Belgium, France, Germany, Japan,
Netherlands, Norway, Switzerland; Fertiliser and pesticide taxes, like Austria, Belgium,
Scandinavian countries.
b. User charges/fees/natural resource taxes: - This is payment for cost of collective services
(charges), or for use of a natural resource (fees or resource taxes). In the absence of si=uch
charges, individuals and/or organization may over exploit the environment, which challneg the
sustainability of the natural resource. Hence, by changing such taxes, we can protect the
environment. For example, Ethiopia may charge user charges on municipal waste collection,
treatment or disposal Hazardous waste, wastewater user, and aircraft noise charges; water
extraction charges (thought to be effective in several Asian countries); congestion pricing
(France, Norway, Singapore, USA)
c. Product charges/taxes: -It is applied to polluting products. This is related to payments that are
made by the polluters; when they generate more emission, they pay more and vice versa. By
charging such taxes, we can discourage the polluters, and protect the environment. For example,
Ethiopia may charge like in Hungary: vehicle tyres; Finland: nuclear waste; Italy: plastic bags;
and Belgium: disposables tax
d. Emissions abatement and resource management subsidies: -These are financial payments designed
to reduce damaging emissions or conserve scarce resources. This is subsidy by the government
which is paid for those individuals and organizations that are involved in reduction of stock of
pollutions. For example, Ethiopia may subsidize for organizations that are engaged in pollution
reductions, like Quebec, which subsidizes for energy generated from waste; Norway, which grants
to ecological farming.
e. Marketable (transferable, marketable) emissions permits: - This is a applied using two systems:
those based on emissions reduction credits (ERCs) or cap-and-trade.
f. Deposit-refund systems: - It is a fully or partially reimbursable payment incurred at purchase of a
product. For example, when organizations purchase equipments that can be used to reduce or
avoid pollutants, the government of a country can refund partially or fully the amount which is
used to purchase the equipment. Ethiopia may apply this instrument, like in Austria: refillable
plastic bottles; Quebec: one-way beer and soft-drink bottles, which is also used in Korea, Greece,
Norway and Sweden
g. Non-compliance fees: - This is about Payments made by polluters or resource users for non-
compliance, usually proportional to damage or to profit gains. Due to fear of charges, polluters can
reduce waste emissions. If the absence of compliance to the law, individuals and organizations are
punished for their actions. Hence, to protect the ‘unnecessary’ payment, polluters will not violate
the standards; this helps to protect or reduce the environmental pollution. This instrument can be
applied in Ethiopia, like what is being practiced in Greece: for car emissions, and Sweden: sea
dumping of oil from ships.
h. Performance bonds: - This is a deposit paid, repayable on achieving compliance. That is, potential
polluters pay performance bonds before their operation for their conformability to the standards.
The bond is not refundable if they do not meet the standards. Hence, to collect their performance
bonds, organizations will be forced to respect the environmental laws and standards. Ethiopia may
apply this, like Australia for mine sites, and USA for open pits
i. Liability payments: - It is payments in compensation for damage. That is, individuals and
organizations are made to pay for what they damaged. Payment of such money can be painful to
the polluters. Hence, not pay such charges, polluters will not cause environmental damages.
Ethiopia may apply this instrument like in Japan for waste – restoration of sites polluted by illegal
dumping.
3. Discussion about efficient properties of pollution tax and its relevancy

Firms that attempt to control their pollution are placed at a competitive disadvantage; due to the added
expense, their costs of production are higher than those of their hard-working competitors. Not only does
the unimpeded market fail to generate the efficient level of pollution control, but also it penalizes those
firms that might attempt to control an efficient amount. Therefore, government intervention is strong for
pollution control.

According to the Ethiopian Environmental Pollution Control stated in Proclamation No.300/2002, no

person shall pollute or cause any other person to pollute the environment by violating the relevant
environmental standard otherwise it has to pay the cost of the pollution. The Ethiopian government also
supports the idea that pollution emitted from households, factories and services industries like hotels and
restaurants must be controlled. To control and manage the pollution, it needs a series follow up by their
respective municipalities or local governments. For example, residents of Mekelle city are paying fee to
the city administration to manage the solid and liquid waste produced via waste collectors who engaged a
formal contract with the government. Huge factories like cement and other chemical factories are also
found in Ethiopia which has been producing pollution that would affect human health. In this respect, the
government is levying huge taxes especially on those factors which produce undesirable products like
cigarette to discourage production.

Each emitter should control its pollution until the marginal cost of controlling the last unit is equal to the
marginal damage of causes. One way to achieve this outcome will be to impose a legal limit on the
amount of pollution allowed by each emitter. An alternative approach would be to internalize the
marginal damage caused by each unit of emission by means of a tax or charge on each unit of emissions.

Anyways, there is a polluter’s pay principle that balances the amount of pollution to be emitted to the
environment. Levying tax on pollution is efficient even if the application to do so is very difficult. As we
all know the source of revenue for government is tax. Therefore, the taxes from pollution are also relevant
as revenue for governments to provide public services like roads, water, electricity etc. On the top of that
the victims of the pollution must also be compensated. To do so, taxation is one of the approaches to be
followed by the government of Ethiopia.

4. Discussion about command and control on emission standards

Emission standard is a legal limit on the amount of the pollutant and individual source is allowed to emit.
For this, there is the command-and-control approach. While emission standards are used, there is no
reason to believe that the authority will assign the responsibility for emission reduction in cost-
minimizing way. Some policy instruments do allow the authority to allocate the emission reduction in a
cost-effective manner even when it has no information on the magnitude of control costs. There are policy
approaches rely on economic incentives to produce the desired outcome. The two most common
approaches are known as emission charges and transferable emission permits.

An emission charge is a fee, collected by the government, levied on each unit of pollution emitted into the
air or water. The total payment any source would make to the government could be found by multiplying
the fee times the amount of pollution emitted. Emission charges reduce pollution because pollution costs
the firm money. To save money, the source seeks ways to reduce its pollution. A profit-maximizing firm
would control, rather than emit, pollution whenever it proved to do so. It would pay the firm to reduce
emission until the marginal cost of reduction is equal to the emission charge. The charge system not only
causes sources to choose a cost-effective allocation of the control responsibility, it also stimulates the
development of newer, cheaper means of controlling emissions, as well as promoting technological
progress.

Under transferable emission permit, all sources are required to have permits to emit. Each permit specifies
exactly how much the firm is allowed to emit. The permits are freely transferable; they can be bought and
sold. The control authority issues exactly the number of permits needed to produce the desired emission
level. Any emissions by a source in excess of those allowed by its permit would cause the source to face
severe monetary sanctions. The command and control instruments that would be applicable in developing
countries are presented as follows:

a. Input controls over quantity and/or mix of inputs: -this enables requirements to use particular
inputs, or prohibitions/restrictions on use of others. This bans on use of toxic cleansing agents.
b. Technology controls: - this tool enforces requirements to use particular methods or standards. This
needs requirement to install catalytic converters in exhausts.
c. Output controls:
i. Output quotas or prohibitions: - this limits non-transferable ceilings on product
outputs. This prohibits use and emission level of pollutants.
ii. Emissions licenses: - It limits on the Non-transferable ceilings on emission quantities.
iii. Location controls (zoning, planning controls, relocation): - The instruments help in
specifying regulations relating to admissible location of activities. For example, it may
state heavy industry zoning regulations
The emission standards are discussed in question number one, and the details are attached as appendix.
5. Discussion about workability of transfer of emission permits

Is transferable emission permit works in Ethiopia?

No, it is not work because it needs different necessary criteria’s to fulfill this is done by the
developed countries most of the time.

Transferable Emission Permits

An effluent tax requires that some central public authority establishes a tax rate, monitors the
performance of each polluter, and then collects the tax bills. It is essentially an interaction between
polluters and public authorities in which we might expect the same type of adversarial relationship we get
in any tax system. In this chapter we will take a look at a policy approach that, while incorporating
economic incentives, is designed to work in a more decentralized fashion. Rather than leaving everything
to a centralized public agency, it works through the decentralized market interactions of polluters
themselves. It’s called the system of transferable emission permits (TEPs).

General Principles

A transferable emission permit creates a transferable property right to emit a specified

amount of pollution.

In a transferable emission permit system a new type of property right is created. This property right
consists of a permit to emit pollutants. Each permit (also known as an allowance) entitles its holder to
emit one unit (kilogram, tonne, or however the permit is calibrated) of the waste material specified in the
right. Rights holders would ordinarily have a number of such permits at any point in time. If a discharger
owned 100 permits, for example, it would be entitled to emit, during some specified period of time, a
maximum of 100 units of the designated type of pollutant. Thus, the total number of permits held by all
sources puts an upper limit on the total quantity of emissions. These discharge permits are transferable;
they can be bought and sold among anybody allowed to participate in the permit market, at whatever
price is agreed upon by the participants themselves. Transferability is a key component of the TEP
system. If rights are not transferable, the system is effectively the same as the assignment of an individual
standard to each polluter. The regulator would then lose many of the key advantages of a TEP system, as
we’ll see.
Issues in Setting up a Transferable Emission Permit Market
The Initial Rights Allocation
The success of the TEP approach in controlling pollution depends critically on limiting the number of
rights in circulation. Since individual polluters will no doubt want as many as they can get in the first
distribution, the very first step of the program is one of potentially great controversy: what formula to use
to make the original distribution of emission rights. Almost any rule will appear to have some inequities.
Regulators might contemplate distributing them equally among all existing sources of a particular
effluent. But this would encounter the problem that firms vary a lot in size. Some pulp mills are larger
than others, for example, and the average size of pulp mills in terms of value of output may be different
from the average size of, say, soda bottling plants. So giving each polluter the same number of permits
may not be fair at all.

Transferable discharge permits are being used more frequently in North America. Several programs are
already in place in the United States; for example, there is a TEP program for SO 2 reduction among
electric power producers A world carbon trading system is being investigated by a number of countries,
and companies are actually engaging in trading carbon in anticipation of this market. TEP programs are
being contemplated in Canada for carbon trading, nitrogen oxide, and volatile organic compounds.
Canada had a type of TEP program for elimination of chlorofluorocarbons there is the expectation that
this approach could give us pollution control at a substantially lower cost than the current system of
performance and technology-based effluent standards, and also a sense that, politically, they would be
more acceptable than emission taxes.

But TEP programs come with their own set of problems. How the TEP market operates is obviously
critical to whether this type of policy will work. There are a host of important factors: who gets the
permits at the beginning, the strength of their incentives to minimize costs, the degree of competition in
the market, the transaction rules set by the administering public agency, the ability to monitor and enforce
compliance, and so on. Nevertheless, the transferable discharge permit system seems to be an idea worthy
of the attention it is getting.

Both transferable discharge systems and emission tax systems seek to take the burden and
responsibility of making technical pollution-control decisions out of the hands of central administrators
and put them into the hands of polluters themselves. It is important to stress the following point:
Incentive-based policies such as TEPs and taxes are not aimed at putting pollution-control objectives
themselves into the hands of the polluters. It is not the market that is going to determine the most efficient
level of pollution control for society. Rather, the policy instruments are means of enlisting the incentives
of the polluters themselves in finding more effective ways of meeting the overall objective of reducing
emissions.

6. Discussion about efficiency gains of waste collection and disposition

There are three stakeholders in this arrangement. The specific roles of each of the stakeholders can be
explained as follows:

i. The municipal authority: - the specific roles of the municipals authority in its objective of maintaining
the environment clean are

a) It hired a firm that collects waste from households and disposes it

b) It pays the hired firm for the quantity of waste collected and disposed

ii. The firm: - is assumed to go to maximize its profit while discharging its responsibilities with the
following roles

a) It is hired by the municipal authority

b) It is paid by the municipal authority according to the quantity of waste collected
c) It is charged a pollution control
iii) The household: - in its need for its waste to be collected has the following responsibilities

a) It pays an annual fixed charge regardless of the quantity of waste each leave for collection
b) Each don’t pay variable cost
Now, according to this arrangement, each household is not charged proportional to the quantity of waste
it releases, this looks the weak link in the arrangement. Therefore, a household leaving a large amount of
waste is getting the service of waste collection with smaller payment in relative terms compared to the
household releasing small amount of waste. That could be a challenge towards attaining efficiency. A
household leaving lots of waste may not bother about minimizing or optimizing its waste release as it is
paying less in relative terms. On the other hand, a household leaving small waste could be discourage to
continue paying the fixed amount as it is paying higher in relative terms.
Therefore, efficiency gains are possible if households are made to pay proportional to the amount of
waste they leave rather than a fixed annual fee.

7. Discussion about comparison of tax effect on output of the good and the pollutant emission

We may think of the auto industry that produces cars that releases pollutants in its production and the use
of cars for driving which are outputs of the cars produced can be considered as analogous case to the case
raised by the question.

The manufacturing of a car uses a number of inputs that release carbon foot prints. For instance, one
study revealed that gas, electricity, metal extraction, rubber manufacture and the manufacture of tools and
machines, business travel and stationary for Car Company employees are all inputs among others in the
car manufacturing process. Each of these inputs releases pollutants to the environment by their own
means. By one estimate, a new average car production releases 17 tons of CO2e of carbon to the
environment.

Now, it is obvious that driving gasoline utilizing cars releases carbon to the environment. And, old cars
are worse in terms of hurting the environment due to the amount of carbon they release. However, the
question here is that, what is the optimum amount of mile a car should cover before being replaced by a
new one for an overall efficiency to be achieved, considering a production of a new car by itself releases
considerable amount of carbon foot print.

In conclusion, the efficiency of the outcome of a good that releases pollutant in its production has to be
evaluated in terms of the amount of pollutant that the outcome of the good releases as well as in terms of
the amount of pollutant emitted in the production of the good itself. That is how efficiency can be
ensured. In this particular case for instance, taxing the auto industry could be more effective than taxing
the outcome of the good so that people would be discouraged from looking for new cars in short period
without being bothered enough for the environmental damage the production of a new car causes.