Three Essays on Environmental Economics: Subsidies, Free Riding, and Public Shaming

Abstract

Chapter 1: When Environmental Subsidies Backfire: The Case of Black Liquor and the Alternative Fuel Mixture Tax Credit: In 2005, the US government introduced the Alternative Fuel Mixture Tax Credit (AFMTC), which paid fifty cents/gallon for alternative fuel that was mixed and burned with traditional fuel. The American chemical pulp industry, which has traditionally burned ‘Black Liquor’, a residue of the pulping process, was able to make large claims on this subsidy in 2009 by mixing diesel fuel into a process where it was not required. This scenario exhibits two main downfalls of environmental subsidies: (i) the majority of the subsidy is paid to free-riders, and (ii) there are strong incentives towards overproduction and increased pollution. In this paper, the value of the AFMTC per tonne of chemical pulp is computed and used in a simulation using the Global Forest Products Model (Buongiorno, 2001) to calculate the effects of the AFMTC on the American and Canadian chemical pulp industries. The simulation suggests that the total amount paid to the American chemical pulp industry was US$7.63 billion, that American chemical pulp production rose by 2.5 million tonnes from the baseline, and Canadian production and exports to the US fell by 285,000 and 255,000 tonnes respectively, costing Canadian chemical pulp producers US$132 million in lost production. Using Canadian chemical pulp production and pollutant release data, production/release averages were developed. These averages suggest that the increase in American chemical pulp production led to significant increase in releases of greenhouse gases, hydrogen sulfide, sulfur oxides, nitrogen oxides and particulate matter. Chapter 2: The Alternative Fuel Mixture Tax Credit and the Pulp and Paper Green Transformation Program: A Policy Comparison: In 2009, chemical pulp mills in the US and Canada were able to take advantage of two subsidy programs that paid mills fifty cents for every gallon of ‘Black Liquor’ burned during the pulping process. Black Liquor is a residue product from the production of chemical pulp, and is traditionally used as a fuel in further pulp production. These subsidies were the Alternative Fuel Mixture Tax Credit (AFMTC) in the US and the Pulp and Paper Green Transformation Program (PPGTP) in Canada. Even though the AFMTC was a subsidy that applied to many industries, and the PPGTP was only available to chemical pulp mills, in the context of the chemical pulp industry only, the subsidies were almost identical: Both paid mills the same amount for undertaking the same activity, and mills were able to claim the subsidies for roughly the same amount of time. The key difference between the two programs was stipulations on how the money was to be spent. In the US, the AFMTC was a refundable tax credit, and simply another source of revenue for a recipient mill. In Canada, a recipient of PPGTP funds was required to spend the money on some form of capital investment that would increase energy efficiency or lower pollution emissions from the mill. In this paper, we develop a theoretical model with a representative chemical pulp mill in order to compare the effects that these two subsidies would have on the mill’s production of pulp (and in turn its production and use of black liquor), and its decision in whether to invest in a one-time capital improvement that would increase energy efficiency at the mill. The results from this model show that the PPGTP was a more effective policy than the