Estimates of air pollution abatement costs based on comprehensive U.S. Census data provide a practical basis for decisions by developing countries on which industries to target and which emissions charges would be most efficient in which circumstances
Estimates of the costs of reducing emissions of major air pollutants in the United States show that these costs can vary dramatically across sectors for the same pollutant. The highest abatement costs for a pollutant are often 10 times greater-and sometimes 100 times greater-than the lowest costs. The estimates also show large differences across pollutants in the average costs and in the range of costs of their abatement.[1]
For environmental policymakers, these results suggest an important lesson. Command-and-control regulation in the United States seems to have reduced pollution at a very high cost. Optimal regulation would attain the desired reduction in pollution while equalizing the marginal cost of abatement across sectors. Where feasible, market-based instruments such as emissions charges and tradable permits are optimal in this sense.
In principle, regulators who were properly informed about abatement costs could approach this optimum using command-and-control-type methods. In practice, nothing like this has occurred-as shown by the wide variance in the abatement costs for a pollutant across sectors.
Since regulatory resources are scarce, it makes sense to focus initial efforts on sectors characterized by relatively large contributions to total emissions and relatively low average costs of abatement.
The econometric research reported here was undertaken in collaboration with the Center for Economic Studies, U.S. Bureau of the Census. At the Center researchers had access to the U.S. Department of Commerce's annual 20,000-plant random survey of pollution abatement costs and expenditures. All told, the estimates reported in the study reflect the experience of about 100,000 U.S. manufacturing facilities. In depth and coverage, they are by a considerable margin the most complete estimates available.
Are these U.S. estimates a credible guide for benefit-cost analysis in developing countries? That depends on the answers to three basic questions:
Until recently most developing countries have had little formal regulation of air pollution. Data on pollution abatement costs are generated only by abatement, so it would be quite difficult to assemble a large, comprehensive, and reliable database on abatement costs, by pollutant, in developing countries. The U.S. estimates are built from a complete accounting of costs, including capital, labor, energy, materials, and services. Thus, they are not idealized engineering estimates, but numbers for thousands of plants under actual operating conditions.
The estimates are based on high mandated levels of pollution control in the United States. They also reflect U.S. input costs. While some inputs to abatement are traded at roughly constant prices in international markets, the nontraded inputs generally will be more costly in higher-income economies. U.S. abatement costs therefore should be higher than costs in developing countries unless protection or scarcity of engineering skills have very strong countervailing effects. Taking the regulatory and cost factors into account, the U.S.-based numbers provide conservative upper-bound estimates of pollution control costs in developing countries. Regulatory options estimated to have high net benefits when evaluated using these numbers would probably look even better if local abatement cost estimates were available. Future research in the Policy and Research Department of the World Bank will generate such estimates for a broad sample of developing countries.
Air pollution abatement is an activity of the firm, characterized by multiple inputs and multiple outputs. The outputs are abatement volumes for all pollutants controlled by the firm. Separate abatement activities, like other productive activities, have joint and common costs. Although firms have accounting conventions, the truth is that imputing these costs to separate activities is an exercise in inference from observed experience. In such a case there is no substitute for econometric cost function estimation from large samples.
The estimates of abatement costs can be used in two ways:
Efficient command-and-control regulation. Direct command-and-control regulation will be much more efficient if it is informed by estimates of relative abatement costs. The estimates should be read as the costs associated with attaining a relatively uniform (and strict) concentration standard for air emissions across sectors. Intersectoral variation in plant-level costs reflects significant differences in the average scale of abatement, number of emissions sources, pretreatment concentration levels in the waste stream, and myriad technical factors. To attain near-uniform emissions standards, plants in different sectors must incur very different average costs of abatement.
With scarce resources for monitoring and enforcement, many new regulatory institutions will want to focus on the sectors that are the largest emitters of locally dangerous pollutants. Once those sectors are identified, targeting should be informed by the relative cost of abatement. Consider, for example, particulate emissions from pulping and steelmaking facilities. If both are heavy local polluters, the cost estimates would imply focusing on pulping facilities because their abatement costs are only 25% of those in steelmaking.
Cost-effective regulatory strategies. If complete sectoral data on emissions are available, a more sophisticated approach is warranted. In a simple example, suppose an area has five sectors that are significant emitters of suspended particulates. Order the sectoral emissions and cost data by ascending average abatement cost (see table).
These numbers provide a guide for economically sensible strategy, whether it is command-and-control or market-based. When sorted by ascending unit cost, the numbers trace a rough aggregate social marginal cost curve: cumulative abatement can be approximately related to the unit cost of abatement. Suppose, for example, that a country wants to set quantitative targets for emissions reduction. The cheapest abatement will be in nonmetal products (principally cement), where 400 tons of particulate can be abated for about $20 a ton. Next cheapest is pulp and paper, where 100 more tons can be eliminated at $43 a ton. Abatement from these two sectors will eliminate 50% of total emissions.
It can therefore be stated, with rough accuracy, that the marginal social cost at 50% abatement of particulates is $43 a ton. At 75% abatement, the marginal social cost rises sharply to $127 a ton; at 95% abatement, to $182 a ton. So, a move from 40% abatement to 95% entails a ninefold increase in the marginal cost of abatement. Such large step increases should be enough to make policymakers think hard about the optimal degree of abatement in particular circumstances.
It is also possible to reverse the logic of the example and use it as a guide for setting emissions charges. The numbers say that an emissions charge of $30 a ton should give approximately 40% abatement since it will be generally cost-effective for polluters in nonmetal products to reduce emissions substantially (at $20 a ton) rather than pay the charge. Doubling the charge (to $60) should buy another 10% abatement. To effect 95% abatement, the charge would have to be tripled again, to something over $182 a ton.
These simple examples illustrate the potential utility of the cost estimates in the table.
