Efforts to control pollution have traditionally targeted point sources of pollution. Currently, most developed countries are focusing on controlling nonpoint sources of pollution (NPP). According to Segerson and Wu, control of NPP is always difficult due to their diffuse nature.1 In this context, observing the emission of pollutants is often difficult.
Consequently, policy instruments that target emission rates can not be effective in controlling NPP. In response to this challenge, alternative NPP control methods such as input taxes, ambient taxes and direct revelation have been proposed by economists.
Segerson and Wu assert that first best control measures for NPP can be achieved through the use of policy instruments that are characterized with flexible incentives. Developing the first best policy instruments involves the use of information about the characteristics of farms. Acquiring this information is likely to be very expensive and this limits the use of first-best instruments.
Second-best instruments enable policy makers to reduce information, as well as, transaction costs. However, the second-best instruments can not achieve the desired water quality at the least or minimum abetment cost. In countries such as the U.S, policies that encourage farmers to voluntarily adopt less harmful practices or to join voluntary programs that enhance water quality are used.
According to Segerson and Wu, the voluntary programs have had varying success, and therefore can not be relied on.2 Thus, Segerson and Wu conclude that voluntary programs and mandatory approaches cannot be used in isolation to achieve the desired reduction in agricultural NPP.
This implies that voluntary programs and mandatory approaches should be used as complementary policies. In this context, mandatory approaches have the potential of inducing famers to abate. The voluntary approaches, on the other hand, provide the flexibility required to meet environmental quality targets at lower costs.
Thus, Segerson and Wu propose the use of a combined approach which makes use of both the mandatory and voluntary approaches. They argue that the combined approach is more effective than the voluntary approach. It also involves less transaction costs as compared to a tax approach.
Segerson points out that best management practices can not be used to control surface NPP effectively. This is because best management practices do not facilitate flexibility and the use of cost-effective abetment strategies.
Segerson also notes that soil loss tax can not be effective in controlling agricultural NPP since it does not take into account the difference between discharges and the pollutant levels that cause damages.3
Segerson agrees with Wu and Segerson’s finding that the measures used to control point sources can not be used to control nonpoint sources due to the high costs involved in observing discharge and abatement levels. Additionally, Segerson asserts that it is not possible to infer the abatement and discharge levels based on the observed ambient pollutant levels, due to the following reasons.
First, the effect of any abatement level on environmental quality can not be determined with certainty due to the stochastic nature of the involved variables. Second, ambient levels are determined by the emissions caused by several individuals.
However, only the combined effects of such emissions can be observed, hence the difficulty in controlling NPP. Thus, Segerson proposes the use of an economic incentive approach that can be effective under uncertainty, as well as, monitoring difficulties.
In this case, rewards should be given when water quality exceeds some pre-determined standard. Penalties should be used when the water quality is substandard.
Shortle and Horan identified three problems in controlling NPP. The first problem is who to target with the NPP control policies. The second problem is how to define and measure compliance with regulations that control pollution.4
The third problem is how to facilitate changes in production, as well as, pollution control practices in order to realize the desired environmental quality using a given set of compliance measures. Shortle and Horan argues that NPP control measures should target individuals or entities directly liable for NPP emissions.
The control efforts should be based on the polluters’ contributions to ambient levels, as well as, the abatement costs. However, the unobservable nature of NPP emissions coupled with the large number of polluters creates a moral hazard problem. Consequently, targeting polluters on the basis of their contributions to ambient levels becomes complicated.
Increasing the number of individuals to be targeted by the pollution control measures can result into high monitoring, as well as, enforcement costs. Additionally, individuals who cause little or no pollution might be regulated, thereby “increasing costs without increasing benefits”.5
Reducing the number of individuals to be targeted, on the hand, reduces effectiveness and hinders cost-effective allocations. Shortle and Horan assert that compliance bases should be correlated with environmental conditions. They should also be enforceable and targetable.
Economic Instruments/ Measures used to Control NPP
Incentive Scheme Approach
Segerson proposed an incentive scheme that involves the use of rewards and penalties to control NPP emissions. According to Segerson, mechanisms that provide incentives should be used to enhance compliance with environmental regulations since NPP emissions are unobservable. In the context of a single polluter, the incentive scheme works as follows.
Assume x is the current ambient level in the stream while X is the desired standard level which is determined by the authorities. The actual ambient level, x, is determined by the abatement measures, as well as, random variables such as the weather or stream conditions.
The incentive scheme to be used to influence the ambient level can be in the form of compulsory payment, T(X). The amount to be paid depends on the difference between the actual ambient level (x) and the standard or the desired ambient level (X).
The payment scheme has two components, t and k, which are set by the authorities. The first component, t, can be a tax or subsidy whose value depends on the difference between x and X.6
A tax that is proportional to the difference between x and X is paid by the polluter when the ambient level is higher than the level set by the authorities. However, if the actual ambient level is lower than the level set by the authorities, the polluter receives a subsidy that is proportional to the difference between x and X.
The penalty, k, is imposed when x exceeds X. however, the value of the penalty is independent of the difference between x and X. The prices of inputs are normally fixed in the short run.
Thus, the two components, t and k, can be applied either in isolation or in combination in order to achieve the expected level of abatement. The ability to have different combinations of X, t and k in the short run provides the flexibility that enhances long-run efficiency.
In the case of multiple polluters, t and k should vary across polluters. The liability of each polluter is determined by the ambient levels caused by the entire group of polluters rather than individual contributions. The free-rider problem is addressed by the fact that paying for additional pollution does not distort the marginal incentives.
Voluntary Approach with Threat of Ambient Tax
Segerson and Wu proposed “a policy that combines voluntary approach to controlling nonpoint source pollution with a background threat of an ambient tax”.7 In this case, the ambient tax is to be used when the voluntary approaches fail to control nonpoint emissions.
Segerson and Wu argue that using a voluntary approach alongside a threat of ambient tax can facilitate cost-effective abatement. Additionally, this approach does not require information about the nature of pollution from each farm.
In the case of a single polluter, “if the tax is applied retroactively, then the voluntary cost-minimizing abatement is the unique optimal response to the policy if the cutoff level of pollution is set sufficiently low”.8 However, if a retroactive tax is used, the voluntary cost-minimizing abatement will be the unique optimal response for any level of pollution.
The cost-minimizing abatement can still be a SPNE even if the policy is applied among heterogeneous farmers. However, the equilibrium will not be unique if the tax is not used retroactively. This implies that a zero voluntary abatement will be an equilibrium position if the farmers are not willing to voluntarily undertake the required abatement on their own.
When the free-rider problem exists, equilibrium can still be achieved and the targeted level of abatement can be realized. However, the targeted abatement level can not be realized at minimum cost. “The zero voluntary abatement equilibrium and the free-riding equilibrium can be eliminated by threatening imposition of a retroactive tax”.9
In this case, the farmers who fail to meet the targeted level of abatement risk paying a retroactive tax. At equilibrium, the tax is not imposed and this eliminates the information costs. However, efficiency can be lost if the tax is not retroactive.
Emissions Proxies
Policies that are based on emissions proxies involve the use economic incentives, as well as, regulatory standards. These incentives and standards can target polluters’ production or pollution control practices.
However, a first-best allocation can not be achieved by applying a tax on unbiased estimators of emissions unless the conditions are very restrictive. A second-best incentive can be used to maximize socially desired net benefits.
Inputs and Practices
Shortle and Horan assert that input-based incentives can be used effectively to influence allocation of resources. Farmers tend to increase the use of inputs whose prices have reduced. Inputs whose prices have increased are often avoided by the farmers.
Responsiveness to input prices increases as technologies that encourage the use of cheap inputs are adopted by farmers. The desired environmental quality can be achieved by taxing inputs that enhance NPP emissions and subsidizing those that reduce NPP emissions.
The moral hazard problem occasioned by high cost of monitoring production, as well as, pollution control practices can be addressed as follows. The structure of the tax or subsidy can be modified by including incentives for farmers who accurately report their production, as well as, pollution control practices.
The tax base can also be reduced so that it includes only famers who can be easily observed. Additionally, the monitoring process can be restricted to a few input alternatives that can be easily observed.10
The difficulty in obtaining information on the cost of controlling pollution can be addressed by obtaining information from the polluters’ profits and environmental types.
Liability Rules
Using the liability rule involves suing a polluter for the damages incurred. The responsible polluter can then sue other polluters who contributed to the damages. The liabilities are imposed only when a suit is initiated and the ruling favors the aggrieved party. Thus, firms cannot be sure of being successfully sued. Liability rules are effective in controlling pollution caused by hazardous materials.
Point-Nonpoint Trading
This approach involves giving limited rights to point and nonpoint polluters to pollute. The polluters are then allowed to trade the rights to pollute in markets. Trading can be used to achieve the desired environmental quality at low social costs.
The polluters are given pollution permits which specify the acceptable emission level.11 Polluters with a higher marginal pollution control costs can buy the permits from polluters with lower marginal costs. Thus, polluters with low control costs will emit less while those with high costs will emit more.
Mixed Approach
This involves combining two or more approaches to control sources of NPP. According to Shortle and Horan, the mixed approach can help in addressing the information challenges associated with the control of NPP. Combining the input tax approach and the liability rules is an example of a mixed approach.
Effectiveness of the NPP control Measures
The incentive approach suggested by Segerson has the following advantages. First, it minimizes government interference with the activities of firms. The firms have the freedom to select the technique that can enable them to abate at the least cost.
This flexibility enables firms to achieve any level of abatement at the lowest cost.12 Second, the authorities do not have to continually monitor firms or to meter emissions. The cost and difficulty in monitoring ambient pollutant levels depend on the type of the pollutant.
These costs can be reduced by focusing monitoring efforts on a few sources that are likely to emit large amounts of pollutants. Additionally, monitoring can be done periodically, especially, in periods when emissions are likely to be very high. Third, cost-sharing mechanisms can be used in the short run to reduce the burden on polluters.
The parameters that determine the amounts to be paid can be adjusted accordingly so that the desired incentives are realized. Such adjustments will also ensure efficiency in the long-run. Finally, the incentive approach can be used to control many types of stochastic pollution since it focuses on environmental quality instead of emissions.
The weaknesses of the incentive approach include the following. First, determining the tax and subsidy parameters is often difficult due to insufficient information. Setting these parameters requires information about abatement costs; the damages caused by ambient pollution, and the contributions of each polluter to the ambient levels. Second, the incentive approach can lead to the use of discriminatory taxation which is illegal.
Segerson and Wu suggested an approach that combines a voluntary approach with a threat of an ambient tax. Using this approach to control NPP sources has the following merits. First, it is more efficient than a purely voluntary approach.
Second it is more efficient than a pure ambient tax approach. These merits are attributed to the opportunity given to polluters to meet the expected level of abatement voluntarily. This flexibility eliminates the need to impose the tax in equilibrium condition.13
Hence, the information costs are eliminated. The weakness of Segerson and Wu’s approach is that cost efficiency is not guaranteed if a retroactive tax can not be used.
The emissions proxies approach can not be used to obtain a first best allocation unless the conditions are highly restrictive. However, obtaining a highly restrictive condition can be very difficult. The liability rule proposed by Shortle and Horan has the following weakness.
First, the liability can only be imposed if the pullers are successfully sued. Thus, firms can not accurately determine the level of abatement to undertake since they are not sure of being sued successfully.
Second, suing the polluter for the damages caused by his emissions may be very expensive. The high cost of the litigation process may discourage individuals from claiming damages.
The main strength of the point-nonpoint trade approach is that the desired environmental quality or abatement level can be attained at low costs. Due to the low costs, many firms are likely to adopt the point-nonpoint trade as a technique for reducing NPP emissions.
However, designing a point-nonpoint trading system that can enhance environmental quality is often a challenge. The challenge is that trading in nonpoint sources can not be conducted on the basis of the actual amount of nonpoint emissions.14
The difficulty in observing the nonpoint emissions complicates the process of metering the amount of emission produced by each polluter. Finally, the mixed approach can help in achieving a first best solution for controlling nonpoint sources. Additionally, it can help in improving efficiency in reducing nonpoint emissions.
Conclusion
The difficulty in controlling nonpoint pollution is attributed to the fact that nonpoint emissions can not be easily observed.15 According to Segerson and Wu, monitoring nonpoint emissions involves high information, as well as, transactions costs. Thus, the approaches used to control point emissions are unsuitable for controlling nonpoint emissions.
Consequently, alternative approaches have been developed by economists to reduce pollution caused by nonpoint emissions. Some of the alternative approaches include the incentive scheme developed by Segerson. Segerson and Wu developed a mixed approach which combines a voluntary approach with a threat of an ambient tax.
In this approach, the ambient tax is only used when the polluter fails to voluntarily take the required level of abatement. The approaches proposed by Shortle and Horan include mixed approaches, point-nonpoint trading, emissions proxies, inputs and practices, as well as, ambient taxes and liability rules.
Even though most of these approaches can help in achieving first-best solutions for controlling nonpoint emissions, they also have weaknesses.
References
Segerson, Kathleen and Wu, JunJie. “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats.” Journal of Environmental Economics and Management 51, no. 1 (2006): 165-184.
Segerson, Kathleen. “Uncertainty and Incentives for Nonpoint Pollution Control.” Journal of Environmental Economics and Management 15, no. 1 (1988): 87-98.
Shortle, James and Horan, Richard. “The Economics of Nonpoint Pollution Control.” Journal of Economic Surveys 15, no. 3 (2001): 255-283.
Footnotes
- Kathleen Segerson and JunJie Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” Journal of Environmental Economics and Management 51, no. 1 (2006):165-184.
- Kathleen Segerson and JunJie Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” Journal of Environmental Economics and Management 51, no. 1 (2006):165-184.
- Kathleen Segerson, “Uncertainty and Incentive for Nonpoint Pollution Control,” Journal of Environmental Economics and Management 15, no.1 (1988): 87-98.
- James Shortle and Richard Horan, “The Economics of Nonpoint Pollution Control,” Journal of Economic Surveys 15, no. 3 (2001): 255-283.
- James Shortle and Richard Horan, “The Economics of Nonpoint Pollution Control,” Journal of Economic Surveys 15, no. 3 (2001): 255-283.
- Kathleen Segerson, “Uncertainty and Incentive for Nonpoint Pollution Control,” Journal of Environmental Economics and Management 15, no.1 (1988): 87-98.
- Kathleen Segerson and JunJie Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” Journal of Environmental Economics and Management 51, no. 1 (2006):165-184.
- Kathleen Segerson and JunJie Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” Journal of Environmental Economics and Management 51, no. 1 (2006):165-184.
- Segerson and Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” 165-184.
- James Shortle and Richard Horan, “The Economics of Nonpoint Pollution Control,” Journal of Economic Surveys 15, no. 3 (2001): 255-283.
- Shortle and Richard, “The Economics of Nonpoint Pollution Control,” 255-283.
- Kathleen Segerson, “Uncertainty and Incentive for Nonpoint Pollution Control,” Journal of Environmental Economics and Management 15, no.1 (1988): 87-98.
- Kathleen Segerson and JunJie Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” Journal of Environmental Economics and Management 51, no. 1 (2006):165-184.
- James Shortle and Richard Horan, “The Economics of Nonpoint Pollution Control,” Journal of Economic Surveys 15, no. 3 (2001): 255-283.
- Kathleen Segerson and JunJie Wu, “Nonpoint Pollution Control: Inducing First-Best Outcomes Through the Use of Threats,” Journal of Environmental Economics and Management 51, no. 1 (2006):165-184.