Grantee Research Project Results
Final Report: The Use of Marketable Permits for Pesticide Control
EPA Grant Number: R829612Title: The Use of Marketable Permits for Pesticide Control
Investigators: Zilberman, David , Sunding, David
Institution: University of California - Berkeley
EPA Project Officer: Hahn, Intaek
Project Period: May 1, 2002 through April 30, 2005
Project Amount: $175,217
RFA: Market Mechanisms and Incentives for Environmental Management (2001) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objectives of the project were to:
- Analyze the issues associated with the introduction of tradable permits in pesticide use rights as a regulatory tool.
- Develop models to analyze and select market-based policies to control pesticide use for regulatory purposes and for comparison with other policy tools.
- Analyze the impacts of regulating methyl bromide under proposed policies, including tradable permits.
Summary/Accomplishments (Outputs/Outcomes):
In general, the regulation of pesticides is a two-step procedure. The first is the ex ante testing stage. It consists of the registration process in which a proposed chemical or other substance is tested for safety before permitting its use for particular applications.
The second stage of pesticide regulation is ex post monitoring. It consists of enforcing regulatory requirements and restricting use (including banning of use) in cases where negative side effects have been discovered.
The analysis of tradable permits for pesticide use has to consider the existing regulatory systems of pesticides and to evaluate how the introduction of tradable permits will fit within the system. Tradable permits are proposed to improve the regulation of chemicals that have already been approved. The efficiency of tradable permits for pesticide use will be substantially reduced if trading is restricted within each specific registered application. Instead, trading of permits will be allowed across a wide range of applications with complementary environmental effects.
The economics of the registration process and its implications received scant attention from economists, and this has become an area of research emphasis for this project. The publication, “The Economics of Biotechnology Regulation,” investigates the registration process, especially in the context of the newest category of pesticides, genetically modified varieties (GMV). The registration process is in response to possible market failure and public concerns that private firms left on their own may insufficiently invest in research on the side effects of pesticides and partially disclose their findings (a moral hazard problem). However, the process has its own shortcomings. Ideally, it will compare the benefits and costs of a new pest control solution with an existing one. The reliance on the precautionary principle in Europe is an extreme manifestation of this tendency to over restrict new solutions. The regulatory process is subject to political-economic pressure, as the registration and use requirements of GMVs in Europe illustrate. An alliance of manufacturers of existing products, environmentalists, and even farmers (concerned about increased supply) may exert pressure to restrict entry of new products and to use environmental and safety regulations as trade barriers (see “Explaining Europe’s Resistance to Agricultural Biotechnology”). Political-economic considerations also suggest tendencies to enhance the costs and the requirements of the registration process. Stricter registration requirements may serve the interest of the regulators and environmentalists, who may be interested in reducing the introduction of new chemicals and GMV biotechnologies, and major agrochemical companies that can afford to pay for the research costs needed for registration. That may lead to less competition and fewer introductions of new pest control technologies than is optimal. Other manifestations of overregulation include narrow definitions of conditions that warrant separate registration for a new pest control technology. If a separate registration is required for the insertion of a transgenic trait to each crop variety, the trait will be inserted only to a small number of crops, leading to loss of crop biodiversity and lower gains from the technology. Narrow definitions on the conditions of distinct applications of a pesticide reduce the size of markets for trading in permits and reduce the effectiveness of permit programs.
Tradable permits are financial incentives–like taxes or subsidies–with an advantage that they do not entail direct flow of funds to or from the government, and they may affect heterogeneous users of pesticides. In many cases they address temporal and immediate externality problems, but in others, for example, the contamination of bodies of water or the damage caused by methyl bromide to atmospheric ozone, financial incentives have to address stock pollution problems. The paper, “Control of Accumulating Stock Pollution by Heterogeneous Producers,” investigates the optimal policy to manage a stock pollution problem caused by input use by heterogeneous farmers. The paper shows that the optimal policy can be derived in a two-way procedure. For every period, one can determine optimal production patterns that maximize economic benefits, subject to aggregate pollution constraints. The second stage determines the optimal pollution level and the resulting optimal pollution stock and shadow price of pollution for every period. The paper suggests that if pollution of every firm can be easily measured, then the optimal solution can be obtained by tradable pollution permits, and the pollution permits and the total quantity of the permits will vary over time until a steady state is reached. If the pollution problem is addressed early when the stock of pollution is low, then the quantity of permits will decline over time and the price of permits will increase over time until a steady state is reached. If a stock pollution problem is addressed when the stock is above steady-state level, the number of permits issued to the industry will reduce pollution and profits drastically and the number of permits will increase until a steady state is reached. Thus, ignoring a stock pollution problem may be very painful, if one wishes to use tradable permits or a tax to obtain the optimal solution. When the pollution of individual producers is not observable, we identify conditions under which tradable permits in observable input-use, for example, pesticides, can be introduced to obtain efficient outcomes. If pollution generation varies across locations, the tradable permit scheme may weigh input use differently across locations. If the relationship between input use and pollution is nonlinear, tradable permits or taxation of pollution by themselves cannot attain an efficient outcome and will need to be accompanied by per acre subsidies or taxes.
Policymaking is frequently subject to uncertainty about the pollution-producing activities of regulated individuals. The asymmetry of knowledge between a regulator and a farmer may result in differences of performance between different policy tools. Previous studies compared tax policies with a binding quantity regulation, for example, a pollution tax versus a prescribed quantity of pollution. In the paper, “Taxes vs. Quotas or Taxes vs. Upper Bounds?” we address situations where policymakers may impose upper bounds on polluting activities; thus, this bound is constraining only part of the time and for only some of the farmers. Many of the current regulations, for example, the Clean Water Act and Clean Air Act, establish upper bounds on the concentration of pollution, so upper bounds are indeed the alternative to financial incentives. We show that failure to consider this upper bound may lead to overestimation and overuse of taxation on financial incentives, and even in some situations where marginal benefit functions are steeper than marginal cost functions of input use and where financial incentives are supposed to outperform direct control, if upper bounds are allowed, then they may outperform financial incentives. Our analysis suggests that under conditions of uncertainty and heterogeneity, introduction of tradable permits should be compared to schemes that impose upper bounds on pesticide use across locations.
Methyl bromide is a very good candidate for tradable permits. The paper, “Pesticide Externality Control: Theory and Applications,” argues that when each unit of pesticides has the same effect on the pollution, both taxation and tradable permits are relatively easy to implement. Indeed, in the case of methyl bromide, each unit used in farming throughout the world has approximately the same impact on atmospheric ozone with the existing technologies. Since the Montreal Protocol constrains aggregate applications of methyl bromide in different countries and sets much stricter limits on the United States compared to Mexico from 2005 to 2015, and given the integration of the Mexican and U.S. fresh food and vegetable supply systems after the North American Free Trade Agreement (NAFTA), we elected to analyze the economic impact of methyl bromide within this context, assuming efficient allocation of pesticide use rights. This is done in the article, “Effect of a Differentially Applied Environmental Regulation on Agricultural Trade Patterns and Production Location: The Case of Methyl Bromide.” It is assumed that Mexico can expand the use of the chemical, but the United States is not allowed to apply methyl bromide in fruits and vegetables. Recognizing heterogeneity in productivity and the alternatives that exist for methyl bromide (leading to reduced yield and extra cost), we derive a mathematical programming model for six crops, each with inelastic demand. We find that disallowing the use of methyl bromide in the United States will lead to changes in crop production patterns and reduction in production of some crops (strawberries, tomatoes). Consumer welfare will be affected most but, even then, modestly (5% reduction in consumer surplus). The Mexican use of methyl bromide will not increase much and, thus, the regulation will decrease total methyl bromide use substantially. However, it will also lead to increased use of other chemicals and increased acreage for the production of fruits and vegetables, which carries some environmental costs.
Journal Articles on this Report : 3 Displayed | Download in RIS Format
Other project views: | All 15 publications | 4 publications in selected types | All 3 journal articles |
---|
Type | Citation | ||
---|---|---|---|
|
Cash SB, Sunding DL, Swoboda A, Zilberman D. Indirect effects of pesticide regulation and the Food Quality Protection Act. Current Agriculture, Food & Resource Issues 2003;4:73-79. |
R829612 (Final) |
Exit Exit |
|
Lynch L, Malcolm S, Zilberman D. Effect of a differentially applied environmental regulation on agricultural trade patterns and production location: the case of methyl bromide. Agricultural and Resource Economics Review 2005;34(1):54-74. |
R829612 (Final) |
Exit Exit |
|
Xabadia A, Goetz RU, Zilberman D. Control of accumulating stock pollution by heterogeneous producers. Journal of Economic Dynamics and Control 2006;30(7):1105-1130. |
R829612 (Final) |
Exit |
Supplemental Keywords:
air, land, soil, stratospheric ozone, risk, sensitive populations, dose-response, chemicals, toxics, organics, ecosystem, pollution prevention, public policy, cost benefit, willingness-to-pay, social science, modeling, analytical, agriculture, chemical industry,, RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics, Ecology and Ecosystems, Market mechanisms, Social Science, effects of policy instruments, financial mechanisms, market incentives, market-based mechanisms, policy instruments, impact of federal policy instruments, policy incentives, policy making, decision making, incentives, socioeconomics, pesticide control, environmental impact fees, pollution fees, pollution allowance trading, public policy, allowance allocation, permit trading, allowance market performance, environmental economicsRelevant Websites:
http://www.farmfoundation.org/projects/05-11EconomicsofAgBiotechRegulation.htm Exit
Progress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.