The ratchet effect in environmental regulations: An empirical and theoretical approach
Abstract
Economists have long favored market-based (MB) systems (e.g. emission charges and tradable discharge permits) as environmental policy tools, arguing that they equate marginal pollution reduction costs across all sources in the short run and encourage the development and adoption of improved pollution-control technologies in the long run. Only recently, the share of MB strategies in environmental regulations has increased. Examples include the tradable discharge permit (TDP) system in SO2 emissions and the Kyoto protocol, which established that MB strategies should be the regulatory instrument for controlling greenhouse gases. Efficiency enhancing properties of MB systems are based on the unrealistic assumption that markets are perfect. The theoretical part of this dissertation examines the effectiveness of MB systems in environmental protection when this assumption is relaxed. The empirical work attempts to bring new evidence to our understanding of how environmental regulations are written and what determines their stringency. The first chapter examines the efficacy of emission taxes in pollution control taking into account asymmetric information and market concentration, by modeling a two-period game between the Environmental Protection Agency (EPA) and a monopolist who is better informed about the abatement technology. If the EPA believes that the firm has the capability to reduce future emissions substantially, it will impose a high tax rate on them. If, contrarily, the EPA believes that the monopolist can reduce future emissions only at a very high cost, it will tax them only at a low rate. The EPA does not know the firm's technology, but it forms a belief about the firm's capability by observing its current emission levels. Faced with the ratchet effect, the monopolist has the incentive to pollute excessively today with the aim of persuading the EPA that future emission reductions will be very costly, which reduces the effectiveness of emission taxes in environmental protection. In the second chapter, the empirical model tests the basic implications of the theory. These implications include the sensitivity of the environmental regulations to economic and political factors where there is little empirical work done. The existing literature has been limited to studying the negative effect of environmental regulations such as lost productivity and unemployment. However, a more complete analysis of regulatory behavior ought to take into account the EPA's sensitivity to these undesirable political side effects. Such analysis would show that trying to maximize its political support, the EPA tailors the environmental regulations in a way, so as to prevent severe negative effects on the industry. This section presents an empirical method for testing the responsiveness of environmental regulations to economic considerations, such as compliance difficulties, productivity slow-down, decline in output, and market concentration. The study examines the Water Discharge Permits in 5 manufacturing industries between 1982 and 1998. A measure of environmental stringency is derived based on the permit levels each plant receives over time. Empirical findings imply that the EPA's behavior toward each industry varies with that industry's compliance performance and economic conditions.
Recommended Citation
Soner Tunay,
"The ratchet effect in environmental regulations: An empirical and theoretical approach"
(January 1, 2000).
Boston College Dissertations and Theses.
Paper AAI9998250.
http://escholarship.bc.edu/dissertations/AAI9998250
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