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At a CEPR lunchtime meeting on 19 October, held to mark the launch of issue no. 11 of Economic Policy, David Newbery presented the results of his recent research into the economic effects of acid rain. Professor Newbery is Director of the Department of Applied Economics, Cambridge, and a Research Fellow in the International Trade and Applied Microeconomics programmes at CEPR. His talk was based on his article `Acid Rain', in issue No. 11 of Economic Policy, also available as CEPR Discussion Paper No. 442, for which the research support from the ESRC grant `Privatisation and the Regulation of Network Utilities' is gratefully acknowledged. Financial support for the meeting was also provided by the ESRC as part of its support for the CEPR's dissemination programme. The opinions expressed by Professor Newbery were his own, however, not those of the ESRC nor of CEPR, which takes no institutional policy positions.Newbery noted that acid rain is produced by emissions of two main types: sulphur dioxide, largely from power stations, and nitrogen oxides, half of which come from vehicles. Air pollution is not a new phenomenon Londoners in the twelfth century complained about the noxious fumes from burning sea coal, and the corrosive effects of sulphur dioxide dissolved in rain have been well understood for at least a century. Californians led the way in introducing regulations on car exhausts, while the Germans were among the first to restrict emissions of sulphur dioxide from power stations. German managers worried that the cost of these regulations would put them at a competitive disadvantage in Europe, and they argued that all EC countries should be equally disadvantaged by cutting emissions by at least as much. This led European policy-makers to set themselves the objectives of a uniform 30% reduction in national emissions of sulphur dioxide and a freeze on emissions of nitrogen oxides. Newbery argued that although the environmental costs of current production technology may be high perhaps even life- threatening they should be set against the costs of carelessly designed environmental regulation, which are also high. Hastily agreed policies will reducing emission levels by less than they should, and they also run the risk of alienating the taxpayers and consumers who ultimately pay for the regulation. Newbery first considered the damage caused by emissions of sulphur dioxide. Within Europe, the prevailing winds are from the West, so Western Europe escapes the worst of the pollution caused by emissions in the East, while countries in the heartland of Europe do far more damage than the Nordic countries. The economic cost of property damage caused by sulphur dioxide is greater than that of ecological damage, and damage to forests and crops is far more costly than the acidification of lakes and rivers. Newbery presented a measure of the cost of this property damage or `damage index' for all the European countries, determined by the amount of acid rain falling in each country and the value of the income produced (which should be closely related to the value of property). This indicated that the greatest `property damage' was caused in the prosperous and heavily populated countries of North West Europe. Newbery argued that uniform cross-country reductions in emissions of the type currently proposed are economically inefficient, since efforts would be better concentrated where the damage done is high and the cost of its abatement low. He then presented his estimates of the levels of abatement each country should attain in order to achieve most efficiently the agreed overall reduction of 30%. The damage done by different polluters varies significantly with location, as does the cost of abatement. These economically justified percentage reductions in emissions vary widely. In particular, France and the UK produce similar levels of environmental damage per tonne of sulphur dioxide emitted, the justified level of abatement for France is only half that for the UK. This is because the UK has more coal-fired power stations than France, where nuclear power is more important, so that the costs of abatement per tonne in the UK are correspondingly lower than in France. Newbery argued further that the costs of these very different levels of reduction might be best borne by the victim, not the polluter. The downwind countries would find it more efficient to pay the upwind countries to reduce their emissions by more than the agreed overall level of 30% than to reduce their own emissions further. In particular, it is already cheaper for the Nordic countries to pay for abatement in Poland than to spend money on reducing their own relatively harmless emissions further than they already have. There may be political difficulties in designing a method coordinating such `payments for abatement' to overcome the `free-rider' problem, but these would also apply to the policing of an agreement to reduce emissions on a uniform basis. Newbery also discussed the effects of nitrogen oxides. While the costs of reducing automobile emissions are certainly high, the health gains are relatively small, and the ecological benefits uncertain. On the other hand, it may relatively be cheap to reduce nitrogen oxide emissions from stationary sources, through the use of better burner designs and the chemical additives. Reducing the appalling pollution levels in the formerly Socialist countries of Eastern Europe must be an urgent task. Moreover, given their inefficiency in the use of energy, substantial reductions should be feasible cheaply and efficiently, in many cases simply by closing down unprofitable enterprises, and moving towards freer trade in energy. |