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After discussed the perceived failures of CAC, the brief criticisms should be borne in mind that the CAC is neither efficient in economic terms, nor effective in changing people’s behaviors in favor of both improving environment and growing economy, and it takes insufficient account of public perceptions of pollution and allow too little public participation. Accordingly, more sophisticated but democratic methods, alternative instruments, are required.
5. Economic instrument: to what extent the failures of CAC could be answered
The categories of economic instruments are the charges, taxes, subsidies, deposit/refund schemes and tradable emission rights (Analysis will focus charges/taxes and tradable emission rights). Thankfully, the economists’ fruits, such as ‘Pigovian Tax’, ‘Pareto Optimal Allocation’, and ‘Coase Theorem’ , could be theoretically justifiable for enacting pollution-control regulations that embody somewhat economic methods. An example could explain how the emission tax (Pigovian Tax) works in an efficient way to abate pollution: For any given amount of abatement, firm A has a higher cost (￡100) of a further unit of abatement than firm B (￡50), when they are both mandated to reduce emission by 90 units. Inefficiency occurs because A’s marginal cost is twice of B’s. If A could cut its abatement by one unit, saving ￡100, while B increases its abatement by one unit, adding ￡50, total abatement would be unchanged but costs would fall by ￡50. Figures may appear that both marginal costs of A and B could be at ￡80 per unit of abatement while A descent the abatement to 60 units and B increase the abatement to 120 units. Then a emission tax, ￡80 per unit of emission, would be imposed in order that each firm has the same marginal cost of the last unit of abatement undertaken. This is the efficient way of abating 180 units of pollution since the two firms have the same abatement costs at the margin, thus minimizing the total costs of reducing the given amount of pollution.
This example makes advantages of emission tax very clear. As far as I can see, several advantages begin to appear. Taking account of differences in abatement costs among firms, the low-cost firms could reduce the higher tax burden by abating pollution; high-cost firms prefer paying tax to expending more on abatement, hence keeping their products competitive in a uniform market. Furthermore, the profit motive will push all firms to find the most efficient abatement techniques for purpose of minimizing their tax bill, while government could relax concerns to direct what technology should be used in pollution control. To this extent, the emission tax creates more incentives than CAC either on development of environmental technology or public participation. Another function of emission tax is that the taxation, in some cases, could change the people’s behaviours in favour of environment. The differential between the duties levied on leaded and unleaded petrol is a vaunted example of an effective tax in Britain. Since the mid-1970s, petrol consumption has increased by about 50% while lead emissions have decreased by about 75%.
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