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The economic approach to the environment
Scientists have now brought compelling evidence of climate change and its link to human activity. In its Fifth Assessment Report, the United Nations Intergovernmental Panel on Climate Change (IPCC) confirms that « human influence on the climate system is clear and growing » and that « the more human activities disrupt the climate, the greater the risks of severe, perva-sive and irreversible impacts for people and ecosystems » (IPCC).
Climate change is therefore—along with many other problems such as air pollution, natural resources depletion, or biodiversity loss—a consequence of human activity negatively impac-ting social welfare through environmental degradation. A particular feature of these problems is that they are the result of decisions by individuals (the polluters) who do not bear the full consequences of their actions. 16 For economists, these problems constitute « externalities » (Pi-gou, 1920), i.e. situations in which individuals produce by their actions external effects that af-fect the well-being of other individuals, without any counterpart. Externalities thus constitute a particular form of market failure, in the sense that in their presence economic laissez-faire leads to an inefficient allocation of resources, and in particular to excessively high levels of pollution.
Since the externalities result from a coordination problem between polluters and polluted parties that cannot be solved by giving free rein to the market, their existence justifies public intervention. The objective of environmental economists is to determine the exact nature of this intervention, in order to improving social welfare as much as possible. There are two main as-pects to this objective : on the one hand, to determine targets for regulation — i.e. the levels of pollution that society must target in order to maximize its welfare — and on the other hand, to determine how to achieve them.
16. For example, passive smoking, exposure to particulate matters or noise pollution are all situations in which the victims of pollution (the polluted) do not have full control over the decision of the polluters.
Determining regulation targets
The choice of the pollution levels to be targeted is a tricky problem, as it involves comparing different types of costs and benefits. While the effects of pollution are harmful and therefore un-desirable, the activities that cause it may themselves be beneficial. Thus, energy consumption induces various forms of pollution, 17 but it also allows us to heat and move around. The ques-tion that economists ask themselves when a regulatory policy is introduced is therefore what is the overall impact of this policy on social welfare. In the case of environmental policies, two elements must be taken into account : the gain in well-being associated with a given reduction in pollution, and the loss in well-being induced by the introduction of the new regulation.
The social cost of pollution
The first element is directly related to what is known as the social cost of pollution (SCP). In order to be able to compare the cost of pollution with other costs, it is translated into a mone-tary equivalent. This monetary equivalent is the maximum price that society is willing to pay to reduce pollution by a certain level. Thus, if the estimated SCP is xe per unit of pollutant, then society should be willing to spend up to xe to avoid the emission of an additional unit of that pollutant. In other words, a good costing 10e to produce and creating pollution with an estimated social cost (SCP) of 5e will cost society a total of 15e. Insofar as this additional cost of 5e is not taken into account by the producer or consumer, this good will be produced and consumed in too large a quantity. In order to remedy this problem, the so-called « pigouvian » approach to externalities therefore consists in making the polluter pay this additional price directly—i.e. the monetary value of the externality—by, for example, introducing a tax of this amount. 18
In practice, the Pigouvian approach can only be relevant if it is possible to estimate the SCP fairly accurately. This implies not only being able to identify all the consequences of the emis-sion of an additional unit of a pollutant, but also to assign a monetary value to each of these consequences. As already noted in Baumol & Oates (1971), for most pollutants this exercise is similar to a « Herculean » task as the numbers of consequences and possible victims are so large and difficult to observe. In the case of greenhouse gases (GHGs) responsible for climate change, as the impacts are both diffuse in time and space, most of the consequences are still unknown and/or non-measurable. By extrapolating from observed climatic or meteorological variations, studies have been able to highlight consequences as varied as the increase in damage linked to natural disasters (Hsiang et al., 2017), a negative impact on the growth and development of poor countries (Dell et al., 2012), an increase in armed conflicts (Burke et al., 2009), a negative effect on health and human capital (Graff Zivin et al., 2018), or an increase in mortality (Des-chênes & Greenstone, 2011). No list, however, can be exhaustive, and as suggested by Weitzman (2009) and Pindyck (2013), the degree of ambition of climate policies should depend mainly not on the known consequences of the phenomenon, but on the possibility of major disasters that would largely alter our lifestyles. Moreover, even if all the consequences were known, cal-culating their monetary equivalent—supposedly to make trade-offs possible and guide political decision-making—is an additional difficulty, a fortiori when this makes it necessary to compare costs and benefits on a very long time scale. 19
While stressing the practical limitations of the Pigouvian approach, Baumol & Oates (1971) suggest that the study of the main consequences of pollutants makes it possible to define pol-lution targets which, although not optimal, induce an increase in aggregate well-being. In par-ticular, the authors take the example of the effect of air pollution on health, for which it is in some cases possible to obtain a first approximation of the damage, and thus to set an environ-mental target (admittedly non-optimal) that makes it possible to limit the main air pollutants and improve collective well-being. In the case of climate change, a similar idea is that of the « carbon budget » : rather than trying to determine the social cost of carbon based on very uncer-tain and uninformative models (Pindyck, 2013), economic models can take as a given a target to be reached (for example, a level of CO2 concentration in the atmosphere consistent with a warming of +2°C) and determine the policies allowing to satisfy this constraint at the lowest cost (Chakravorty et al., 2006). The preference for this second approach over the Pigouvian stra-tegy depends in particular on the sensitivity to environmental risk, since it generally induces higher than optimal abatement efforts, but is consistent with a certain precautionary principle with regard to environmental risks that cannot be perfectly measured. 20.
The indirect effects of regulation
The choice of the level of pollution to be targeted does not only depend on the estimated va-lue of the externality. In order to determine the level of pollution that maximizes social welfare, one must also take into account the indirect effects of public intervention, such as its impact on innovation, employment, or inequalities. This second aspect depends on the specific choice of the regulatory instrument used, and has thus given rise to a large body of literature comparing the relative merits of different approaches to environmental regulation.
The choice of regulatory instruments
The different types of instruments
In some situations, the level of pollution can be reduced to an efficient target level in the absence of a control policy. This is the case when institutions make it possible to negotiate bet-ween the polluter(s) and the polluted, by establishing property rights over the pollution (Coase, 1960). In this situation, the polluters and the polluted are able to agree on the level of pollution in exchange for compensation, thus repairing the market failure. 21 However, for the majority of environmental problems, the polluters and polluted are too numerous and/or too difficult to identify for negotiation to be possible. Decision-makers are therefore led to take specific mea-sures for pollution control in order to achieve emission reduction targets.
Apart from measures to facilitate negotiation, there are two main types of pollution regu-lation instruments : regulatory « command-and-control » instruments and economic « market-based » instrument 22. The first category includes instruments to reduce pollution through rules imposed on production methods (e.g. vehicle consumption standards), bans on certain pro-ducts (e.g. banning the use of chlorofluorocarbons, CFCs), or regulation of their use (e.g. ban-ning polluting vehicles in city centers). The second category includes instruments providing economic incentives to reduce pollution, such as taxes (e.g. carbon tax) and charges (e.g. for household waste collection), subsidies (e.g. environmental bonus on less polluting vehicles), or tradable emission allowances (e.g. EU Emissions Trading Scheme). While the first group of measures imposes the adoption of a certain behavior, the second group aims to induce this behaviour by providing the appropriate incentives.
The relative merits of different instruments
When the decision-maker chooses to take action to reduce pollution, he or she can adjust the level of regulatory constraint or the size of the economic incentives put in place to achieve the target level he or she has set. To the extent that more than one instrument can be used to meet a single environmental objective (albeit with varying degrees of precision), the choice of instru-ments to be preferred depends critically on all their other costs and benefits. The dual objective of decision-makers is therefore to determine which instrument(s) can achieve an environmen-tal objective at least cost (efficiency objective), also considering how the instruments lead to the distribution of this cost among agents (equity objective).
One externality in a stylized model
In a simplified scenario in which the environmental externality would be the only market failure in the economy, market-based instruments provide the most effective response to the problem caused by pollution. By imposing a uniform price on the externality, i.e. on each unit of pollution emitted, these instruments encourage all actors to reduce their pollution as long as this effort « costs » them less than the imposed price. If the price of a unit of pollutant is xe, the agents (households and companies) will prefer to give up their pollution if it brings them a profit of less than xe, but will continue with activities that bring them more profit. The equalization of the marginal costs of abatement therefore makes it possible to achieve a given environmental objective (which may be more or less ambitious depending on the level of the price) at the lowest cost (these instruments are called « cost-effective ») since the emission re-ductions undertaken will be all those—and only those—requiring an effort lower than the price of the externality (Baumol & Oates, 1971). For the same to be true of regulatory instruments, it is necessary to set specific standards for each polluter according to his or her abatement costs. When polluters are numerous and heterogeneous, and even more so when there are informa-tion asymmetries between polluters and the regulator regarding these costs, such a policy is not feasible. The costs of pollution abatement may thus be too high for those who have the greatest difficulty in changing their behavior (e.g. a person living in the countryside who would be prohibited from driving more than 5,000 km per year), and too low for others who could have reduced their pollution further (e.g. a person living in a large city who would be sub-ject to the same constraint). From a dynamic point of view, equalising marginal abatement costs also implies a better efficiency of market instruments through innovation. While regulatory ins-truments impose a binary framework (whether clean technology is adopted or not), market instruments make in theory any reduction in emissions profitable, and thus provide incentives for the development of ever cleaner technologies. 23
In redistributive terms, the effect of market instruments such as taxes depends on how pol-lution is initially distributed in the population. When the taxed pollution is related to energy consumption (as is the case with the carbon tax), taxes are generally regressive because even though poorer households on average consume less energy (and therefore pollute less), this expenditure represents a larger share of their resources (e.g. Poterba, 1991; Metcalf, 1999; Grain-ger & Kolstad, 2010). However, these redistributive effects can in theory be compensated for by means of lump-sum transfers. If these transfers are not conditional on variables that taxpayers can adjust, they will not induce a change in the incentives to reduce emissions. Thus, nume-rous studies have shown that when the income from a carbon tax is redistributed uniformly to all households, the policy becomes progressive : the amount of the transfer is on average hi-gher than the taxes paid by the most modest households, and lower than that paid by the most affluent (e.g. West & Williams, 2004; Bento et al., 2009; Williams et al., 2015).
Multiple market failures
The previous stylized framework highlights the powerful mechanisms that flow from eco-nomic incentives. However, these arguments are based on a number of assumptions that are in practice never fully satisfied. When other market failures come into play, the comparative advantages of market-based instruments need to be reconsidered. In this so-called second-best situation, « a combination of policies is likely to be more dynamically efficient and attractive than a single policy » (Stern & Stiglitz, 2017). Thus, imperfect information may lead to a mi-sallocation of abatement efforts induced by a single tax. This is particularly the case when the diffusion of clean technologies is slowed down by frictions. In this situation, regulatory instruments can have the advantage of producing information on the best available technologies. Where the changes in behavior targeted by market instruments require the development of new infrastructure (e.g. to facilitate the development of cycling or electric cars), public investment can also be a useful complement to environmental taxation. Also, where consumer decisions are not determined by purely rational reasoning, other instruments such as standards or labels can be effective substitutes for or complements to market instruments. Finally, as shown in the first chapter of this thesis, when redistributive effects concern a large number of individuals heterogeneous on multiple dimensions, lump-sum transfers offer only an imperfect response to redistributive problems since the government cannot precisely target households to compen-sate them according to their needs. In the absence of adequate compensation, the mitigation of redistributive effects—partly due to past investments that can only be changed by costly new investments—can only be achieved by facilitating the transition to less polluting consumption patterns, e.g. through support for the conversion of polluting capital (e.g., vehicles, oil-fired boilers).
The relative merits of the instruments therefore depend on the environmental problem un-der consideration, and other issues that may interact with these measures. In general, market-based instruments can be considered necessary (although not sufficient) in the face of global problems with diffuse sources such as climate change, while regulatory instruments are all the more relevant when dealing with pollution whose sources are specific and well-known. Also, the more ambitious the objective is (i.e. close to 100% abatement), the smaller the difference in effectiveness between the different approaches is likely to be (Goulder et al., 1999). Indeed, banning the use of a pollutant is equivalent to a tax high enough to ensure that no one produces and consumes it any more. In these situations where differences in efficiency are small, other criteria are also likely to be decisive, such as the costs of implementing and managing the mea-sure in question (e.g. the cost of monitoring compliance with standards, or of collecting taxes). Finally, where regulatory measures are significant, their effects on the economy are likely to lead to changes in the economic system beyond the level of pollution. For example, by regulating the pollution of firms, environmental policies can force them to reduce their activity, thus affecting employment and wages. On this point, it is again difficult to conclude unequivocally on the be-nefits of each instrument. However, a substantial literature has highlighted the value of taxes whose revenue can be used to finance new public expenditure—such as green investments or compensation to the most negatively impacted taxpayers—or, on the contrary, to lower existing taxes (Tullock, 1967; Terkla, 1984). Thus, by making it possible to replace taxes on goods that society wishes to favour (for example, employment) by taxes on goods that it wishes to reduce (here pollution), environmental taxes make it possible in certain cases to obtain a « double di-vidend », i.e. not only to reduce pollution, but also to favor the economy (Pearce, 1991). 24 This strategy to minimize the aggregate costs of environmental reform is not, however, neutral from a redistributive point of view (Williams et al., 2015). While several environmental tax reforms are possible, they imply an important trade-off between reducing aggregate costs and ensuring their equitable distribution (Goulder & Parry, 2008).
Environmental policies in practice
Successes and failures of environmental policies
The preceding sections provide an overview of the basic framework provided by econo-mic theory for addressing environmental issues. The application of these theories has in the past led to a number of successes in environmental protection. Where polluting products could most easily be substituted by cleaner alternatives, the use of standards has proved effective, as illustrated by the examples of the ban on CFCs or leaded fuels. Standards are also frequently used—sometimes in combination with market instruments—to control water pollution (Shortle & Horan, 2013) and air pollution (Kuklinska et al., 2015). The use of market-based instruments is more frequent for more diffuse problems, or when behavioral changes involve a significant cost. Thus, before their complete ban, the introduction of permit markets led to a gradual reduc-tion in the use of CFCs and leaded fuels (Hammitt, 2000; Kerr & Newell, 2003). These policies have also proved their worth in the management of certain natural resources such as fisheries (Hilborn et al., 2005), or in the regulation of pollutants from energy consumption. Unilateral ac-tions by some countries to reduce their consumption of fossil fuels through CO2 taxation have, for example, proved effective, as shown by the Swedish example (Andersson, 2019) and the British example (Leroutier, 2019; Abrell et al., 2019). In France, the increase in taxation on die-sel has induced a significant change in the car fleet, while the ecological bonus-malus policy has accelerated the transition to less emitting vehicles at a higher rate than the initial projections (d’Haultfoeuille et al., 2011).
However, for many major environmental problems, starting with climate change, the poli-cies implemented remain largely unsatisfactory, as they are insufficient and often inappropriate. While economists agree on the need for a carbon tax to limit climate change, 25 in 2018 55% of the emissions of OECD and G20 countries were not subject to any price (OCDE, 2018). Thus, even in these relatively developed countries the effective levels of regulation remained very low, well below the most conservative recommendations in the literature. Beyond their low level, cli-mate change policies are also striking in their diversity, sometimes at the price of effectiveness. As mentioned above, in a second-best environment, the use of multiple instruments is justified for both efficiency and equity reasons (Stern & Stiglitz, 2017; Stiglitz, 2019). However, the frag-mentation of sectoral policies with numerous exemptions generates important differences in abatement costs between countries and between sectors, leaving room for significant opportu-nities to reduce emissions or their abatement costs. 26
A difficult inter- and intra-generational coordination
The free-rider problem
Undoubtedly, the main explanation for the low ambition of policies in the face of environ-mental threats is to be attributed to a lack of coordination between polluters and polluted. While everyone benefits from the reduction of pollution by others, no one has an interest in suppor-ting the clean-up efforts themselves. This situation thus creates a so-called « free-rider problem », where individuals have a private interest in not contributing enough to a public good. In the case of climate change, this problem is accentuated by two factors specific to the characteristics of this environmental problem : its diffusion in time and space. Because each unit of GHG emit-ted in a given place on earth will have consequences on the entire globe for several centuries, the fight against this pollutant requires the cooperation of all citizens, all countries, all genera-tions. Thus, in the absence of a regulator with authority over all the citizens of the world and representing their common interest—a fortiori that of future generations—the coordination of efforts to combat climate change remains extremely difficult.
Voluntary contributions
In the case of the fight against climate change, the difficulties in coordinating the action of States have led decision-makers to abandon at least temporarily the search for a common agreement setting out binding measures (such as the Tokyo agreement in 1997), in favor of de-centralized decisions in the form of voluntary contributions (the form adopted at the COP 21 in Paris in 2015) (Harstad, 2020). Despite strong incentives for free-riding, many countries have committed themselves to ambitious climate action. In the absence of perfect altruism on the part of all actors, these voluntary contributions are necessarily sub-optimal, and the pledges made at the time of the Paris agreement remain insufficient to meet the announced objective of contai-ning global warming to a maximum of +2°C (Rogelj et al., 2016). These commitments, however, suggest the possibility of developing relatively ambitious environmental and climate policies, motivated by ambitions as varied as the search for economic or environmental co-benefits, the desire to gain a technological lead, diplomatic leadership, altruism or a sense of historical duty (Keohane & Victor, 2016). These promises of the States also echo demand from citizens in many countries, as illustrated by the emergence of climate movements in civil society, 27 or the ambi-tious policy proposals made by French citizens at the Citizen’s Convention for the Climate 28.
Table of contents :
Introduction générale
Main introduction
1 The Vertical and Horizontal Distributive Effects of Energy Taxes : A Case Study of a French Policy
1.1 Introduction
1.2 Data
1.2.1 The French household surveys
1.2.2 Data to simulate the policy
1.3 Estimating households’ responses to prices
1.3.1 The Quadratic almost ideal demand system
1.3.2 Results
1.4 Environmental and distributive effects of energy taxes
1.4.1 The effects on greenhouse gas emissions
1.4.2 Monetary effects between income groups
1.5 Horizontal distributive effects
1.5.1 Monetary effects within income groups
1.5.2 The determinants of within-income group distributive effects
1.5.3 Alternative revenue-recycling strategies
1.6 Conclusions
1.A Descriptive statistics
1.B The microsimulation model TAXIPP
1.C The Quadratic Almost Ideal Demand System
1.C.1 The model
1.C.2 Elasticities
1.C.3 Households’ heterogeneity
1.C.4 Specification and estimation
1.C.5 Results
1.D Policies simulated
1.D.1 The official policy
1.D.2 Targeted transfers design
1.E Matching
1.E.1 Why it is necessary to match BdF and ENTD
1.E.2 The matching procedure
1.E.3 Ex post validation
2 Yellow Vests, Pessimistic Beliefs, and Carbon Tax Aversion
2.1 Introduction
2.2 Context, survey, and data
2.2.1 Context of the study
2.2.2 Our survey
2.2.3 Official households surveys
2.3 Pessimistic beliefs
2.3.1 Self-interest
2.3.2 Environmental effectiveness
2.3.3 Progressivity
2.4 How attitudes shape beliefs
2.4.1 Self-interest
2.4.2 Environmental effectiveness
2.4.3 Progressivity
2.5 How beliefs determine attitudes
2.5.1 Self-interest
2.5.2 Environmental effectiveness
2.5.3 Progressivity
2.6 Conclusion
2.A Raw data
2.B Notations
2.C The use of official household survey data
2.C.1 Official households surveys from Insee
2.C.2 Formulas to compute monetary effects of carbon tax policy
2.C.3 Predicting gains and losses
2.C.4 Distributive effects
2.D Beliefs and persistence
2.D.1 Elasticities
2.D.2 Self-interest
2.D.3 Environmental effectiveness
2.D.4 Progressivity
2.E Estimation of acceptation motives
2.E.1 Two-stage least squares : first stage results
2.E.2 Additional specifications
2.F Control variables
2.G Questionnaire
2.H Profile of the Yellow Vests
2.I Support rates for Tax & Dividend policies
2.J Relation between support and belief in progressivity
2.K Willingness to pay
2.L Ensuring data quality
3 French Attitudes on Climate Change, Carbon Taxation, and other Climate Policies
3.1 Introduction
3.2 The survey
3.2.1 Presentation of the survey
3.2.2 Eliciting attitudes
3.3 Perceptions and Attitudes over Climate Change
3.3.1 Knowledge
3.3.2 Positions
3.3.3 The Reaction Needed
3.4 Attitudes over Carbon Tax and Dividend
3.4.1 Widespread rejection
3.4.2 Perceived winners and losers
3.4.3 Perceived pros and cons
3.4.4 Consumption and mobility constraints
3.5 Attitudes over Other Policies
3.5.1 Preferred Revenue Recycling
3.5.2 Other Instruments
3.6 Determinants of Attitudes
3.6.1 Attitudes over climate change
3.6.2 Attitudes over policies
3.7 Conclusion
3.A Raw data
3.B Sources on GHG emissions
3.B.1 Carbon footprints
3.B.2 Current and target emissions
3.C Details on main regressions
3.C.1 Control variables
3.C.2 Measures for relative preferences
3.D Questionnaire
3.E Who are the Yellow Vests
3.F Supplementary material
3.F.1 Additional results on attitudes over climate change
3.F.2 Test different wording for winners and losers
3.F.3 Additional specifications for determinants of attitudes
3.F.4 Construction of the knowledge index
3.F.5 Logit regressions for determinants
3.F.6 Robustness for the absence of cultural cognition effect
4 Disaster Risks, Disaster Strikes, and Economic Growth : The Role of Preferences
4.1 Introduction
4.2 General framework
4.3 Benchmark : exogenous disasters
4.3.1 Specification
4.3.2 Optimal resources allocation
4.3.3 Optimal growth and the effects of disasters
4.4 Disasters of endogenous probability
4.4.1 Specification
4.4.2 Optimal resource allocation
4.4.3 Optimal growth and the effects of disasters
4.4.4 Disasters and welfare
4.5 Quantitative assessment
4.5.1 Set-up
4.5.2 How likely is it that disasters foster economic growth?
4.5.3 How much do disasters impact welfare ?
4.5.4 Does using Epstein-Zin-Weil preferences matters quantitatively?
4.6 Conclusion
4.A General framework
4.B Exogenous disasters
4.C Catastrophes of endogenous probability
4.D With multiple catastrophes of endogenous probability and endogenous magnitude240
4.E Calibration
