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Friday, January 11, 2008

Hong Kong's Equitable Approach to Pollution Control

Yesterday, The New York Times published an article on new electricity producer regulations in Hong Kong which would tie electricity prices to a producer's emission levels:

The 10-year agreement reached this week between the Hong Kong government and the territory's two companies — Hong Kong Electric and CLP — authorizes the companies to charge electricity rates that will give them a 9.99 percent return on assets.

If either company exceeds regulatory limits for any pollutant, however, it would be required to charge customers less, reducing its allowed rate of return by 0.2 to 0.4 percentage point.

If the companies manage to cut their pollution more than required, then they are allowed to raise prices to the point where they effectively earn bonuses of 0.05 to 0.1 percentage point on their rate of return.

Like most pollution regulations in the U.S., this one creates an economic incentive for industry to comply. But the U.S. usually uses government-imposed financial penalties or, in the case of sulfur dioxide (and possibly greenhouse gases in the future), a cap-and-trade system.

In those regulatory schemes, polluters wind up paying the federal government. In Hong Kong, polluters would be penalized by having their revenue reduced when prices are lowered. This puts money directly back into the pockets of consumers. When electricity producers meet or exceed compliance requirements, consumers pay a little more.

Here's the interesting part: In the U.S., when the federal government collects fines Americans benefit in the form of improved government services, lower taxes, or both; but those benefits may not be realized for years and the average person likely would not even notice them.

Moreover, if a government-imposed fine leads to lower taxes, that disproportionately benefits the top 50 percent of income earners (who contribute 97 percent of tax revenue). In Hong Kong's scheme, the money goes back to all consumers based on consumption levels, which would disproportionately improve the marginal utility of low-income earners.

Oh yeah, and those low-income earners, they're the ones disproportionately affected by pollution in the first place.

When producers are in compliance with the regulations, consumers — regardless of wealth status — pay a little more for the benefits of cleaner air and water.

Reg•Watch isn't sure this would ever work in the U.S., but it could be a more equitable alternative to the kinds of regulations we usually turn to.