Social justice and environmental policy

Andreas Spillmann
University of Basel and BSS Economic Consulting, Switzerland
Redistributional effects Pollution is a result of the fact that the users of natural resources are not confronted by the real opportunity costs. Hence the best way to avoid these externalities is internationalization with a tax or with pollution permits. Nowadays nobody denies this microeconomic approach (Cropper and Oates, 1992). Everybody agrees that environmental protection is one of the most important problems worldwide which is to be solved by economic instruments. Nevertheless, the realization of the idea is difficult. It is a fact that not one concrete measure has followed the Earth Summit of Rio de Janeiro. Environmental policy increases the social welfare, but does not automatically improve the welfare of every individual. The explanation for the slow implementation process is the distributional effects between regions, industrial sectors, age groups or income classes. With regard to the distributional effects between income classes the following controversy is observable. Opponents of market-based environmental policy claim that the distributional effects are socially unjust. They give reasons for the regressive income effects of environmental taxes. The advocates of market based environmental policy defend themselves by arguing with benefits (pollution reduction) and not with costs of the environmental taxes. They introduce the segregation argument and claim that environmental policy is socially just:
Lower income classes live in very polluted regions and vice versa for higher income classes. This geographical segregation of income classes is the argument for why it is the rich and not the poor who benefit from environmental policy.

Social justice and environmental policy 3

The cost argument, which emphasizes the regressive income effects, has been proven many times (Harrison, 1994) and is certainly correct. However, it ignores benefit reflections. The segregation argument includes these benefit reflections, but has never been analysed thoroughly. This highlights the following analysis. The segregation argument suggests an existing context between income and residence pollution. Freeman (1972) had already investigated this statistic context. For the cities Kansas City, St Louis and Washington DC he noticed a diminishing environmental quality (SO2) with decreasing income (Table I). Since then, if somebody wants to prove the social justice of environmental measures with the segregation argument, one quotes Freemans work or similar investigations. However, the segregation argument, as an approach for distribution analysis, might lead to the wrong conclusions:

International Journal of Social Economics, Vol. 22 No. 3, 1995, pp. 3-10. MCB University Press, 0306-8293

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Table I. Pollution and income classes

SO2-value in Income ($) 0-2,999 3,000-4,999 5,000-6,999 7,000-9,999 10,000-14,999 15,000-24,999 Source: Freeman (1972) Kansas City 0.22 0.20 0.18 0.17 0.15 0.14

SO2-value in St Louis 0.97 0.88 0.78 0.72 0.68 0.60

SO2-value in Washington DC 0.82 0.82 0.75 0.69 0.64 0.58

A specific environmental segregation of income classes is sometimes not observable. For instance in Swiss agglomerations, wealthy municipalities are not based in statistically systematic low polluted areas (Spillmann, 1994, p. 113). q Positive income elasticities of demand for environmental goods demonstrate that individuals with high incomes attach a higher priority to the environment (Pommerehne, 1987a). This means, if the poor really live in highly polluted areas and if environmental policy really improves the environmental quality most of all in their areas, then the conclusion is not immediately transparent that low income classes would benefit more from environmental measures. q The segregation argument assumes that environmental benefit is free of charge. Therefore, environmental goods are purely public goods. The first and second objections are only partially connected with microeconomics. They are, on the whole, empirical statements which have already been investigated several times. The third objection is the most interesting question which has not been discussed very often. Therefore, this third point will be the subject of the following discussion.
q

Environment as public goods The attributes of public goods are indepletability and inexcludability. Because of the similar characteristics of environmental goods it is a widespread claim that the environment is a purely public good. On the other hand, the consumption benefit by an individual during his breathing of fresh and clean air does not reduce the consumption benefit of anyone else (indepletability), and on the other hand, without using violence nobody is able to keep somebody else from breathing the air (inexcludability). Public goods are not supplied and demanded in sufficient quantities voluntarily. An optional supply is not rewarding because of the inexcludability and neither is an optional demand because of the indepletability. As a result, market prices do not exist and everybody consumes the same quantities.

Yet, these two consequences are not observable for environmental goods. The Social justice and following will show this crucial point[1]: environmental q Table I showed that the values for air pollution can be different for various policy cities of the USA. The same observation has been made in Switzerland. The Swiss counties have to monitor the air pollution values. These emission reports point out that the values of the pollutant ozone and 5 nitrogen dioxide differ from county to county, even from municipality to municipality. Therefore, it is not always correct to state that people consume the same quantities of environmental quality. q Table II shows results of several empirical price estimations. They demonstrate the dependence between real estate prices and noise or air pollution in the areas. A 1 per cent increase in noise or pollution emissions is followed by a price decrease of between 0.05 and 0.14 per cent and between 0.08 and 1.05 per cent respectively[2] (the estimations are based on an average level). The empirical investigation of the labour market by Getz and Huang (1978) demonstrates that the employers pay their managers systematically higher wages if the environmental quality is strikingly bad; or in other words, if the environmental quality is good enough, the employees accept a wage reduction. These examples show that environmental consumers are explicitly willing to pay implicit environment prices.
Percentage price decrease after a 1 per cent emission increase 0.06-0.10 0.12-0.14 0.05-0.12 0.01-0.02 0.06-0.12 0.10 0.12 0.15 0.14 0.18-0.50 0.54 0.88 0.48 0.30 0.08 0.65 1.05

Location St Louis St Louis Washington Washington Toronto-Hamilton Philadelphia Philadelphia North Virginia Tidewater North Springfield Towson Washington Kingsgate North King County Spokane Chicago Toronto Source: OECD (1989)

Emission Sulfation Particulates Particulates Oxidants Sulfation Sulfation Particulates Leq Leq Leq Leq Leq Leq Leq Leq Leq Leq

Table II. Real estate prices in relation to noise or pollution emissions in the living area

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To summarize, the following is emphasized: one can prove empirically that environmental goods are appropriated with an implicit price mechanism. Consequently, the environment consumer voluntarily pays environment prices. Therefore, it is wrong to claim that the attribute inexcludability exists. As a result of this, environmental goods cannot be viewed as public goods. For the time being, the microeconomic approach is problematic. On the one hand, the theory claims that missing prices the externalities are responsible for the pollution of the environment. However, on the other hand, the existence of implicit environment prices is provable. Environment as club goods or local public goods The existence of environment prices points out that the demanders of environmental goods are excludable in some way. The suspicion is consequently obvious that the environment is either a club good (Buchanan, 1965) or a local public good (Tiebout, 1956). Both types of goods are characterized by the aforementioned attribute indepletability coupled with the attribute excludability. Buchanan established that it would be rewarding to set up a club if goods had the attributes of indepletability and excludability. Sailing clubs exist, for instance, because the landing places are available for several sailors at the same time (indepletability) and the common utilization of the landing places reduces the average costs. The establishment of clubs leads to a decrease of the per capita costs depending on the club size. The per capita costs will fall if the number of members rises, because the members who are not willing to pay a subscription to finance the landing place are excludable of the club membership or the use of the landing places (excludability). Hence, free riders are approvable and prices for club membership have to be observable. Tiebouts local public goods are characterized by limited positive externalities (indepletability). Because of the local limitation of the externalities, each municipality has the possibility of supplying such goods, despite the positive externalities. Local public goods are only consumable within the municipality frontiers. Consequently, municipalities are able to impose taxes or charges and to approve consumers who are not paying it (excludability). The contradiction established in the previous section that on the one hand environment prices are observable and on the other hand environmental pollution is a result of missing environment prices is not solvable with the two demonstrated approaches. Buchanans and Tiebouts models assume that the suppliers of club goods and of local public goods are able to approve non-paying demanders. This, precisely, is impossible for environment suppliers, as microeconomic theory discovered. If industry invests in green technology, or if a motorist drives more slowly and less noisily, both supply a higher environmental quality level and for both it is impossible to internalize the benefit by demanding a cost sharing with the beneficiary. Another reason shows why these two approaches will not solve the established contradiction. In both models there is a price mechanism (membership fees, taxes)

which leads to an optimal allocation of the scarce environmental resources. Price Social justice and distortions do not exist within the models. Consequently, if we explained environmental environmental problems with these models, we would implicitly assume that the policy present environment quality level is already in an optimal position and environmental policy is not at all essential. Environment: a supply-oriented public good/a demand-oriented private good The contradiction between the two theses environment prices are observable and missing environment prices are responsible for environment pollution can be solved with the following reflection. The view of the environment supplier and the view of the environment demander must be differentiated. The environment supplier is the environment polluter of today. Due to the fact that they are unable to internalize the providing benefit after diminishing their polluting activities (inexcludability), the environment is deemed to be a public good. The microeconomic statement, that environment pollution results from externalities, is absolutely right. Yet, according to the view of environment demanders, environment is a private good. If they want to consume a certain quality level in their residential area or at their working place, they have to accept implicit prices, namely higher rents or lower wages (excludability). Actually, a price system works out the appropriation of a certain environment quality. Simply stated, the environment is a supply-oriented public and a demandoriented private good. The allocation mechanism works as follows. There is not only one market area, where demanders and suppliers meet each other, but there are two of them. In the first market area are the environment suppliers. They are faced with voters, members of parliament or of the public administration and assess a certain quality level with collective decisions. This established environment supply is appropriated on the second market area (housing markets or labour market) with a price mechanism. The environment demanders occur only in this market area. They demand a quality level in accordance with their willingness to pay. Of course, the existence of environmental prices in this second market area does not result in an optimal allocation at all. To summarize, the following is emphasized: the fact that environment suppliers are faced with externality problems does not point out that the appropriation cannot work over a price mechanism. Furthermore, between the existence of implicit environment prices and the determination that environment pollution is a result of missing environment prices, there is no longer any contradiction. Implication for distributional effects With respect to the notion that the environment is a supply-oriented public and a demand-oriented private good, then nobody would be able to consume the

environment free of charge, as the segregation approach claims. This leads to the International Journal of Social following two implications of distributional effects: (1) The environment consumers are, to a lesser extent, beneficiaries because Economics the payments of implicit environment prices diminish their benefit 22,3

respective to the consumers surplus. (2) The environment consumer is not the only beneficiary of the environment measures. The revenues of the payments favour a third group the landlords or the employers. For the assessment of the distributional effects caused by environmental measures it is not important whether rich or poor people live in very polluted areas. Environment consumers benefit from decreasing noise, sea or air pollution, but not without paying for it. However, the following questions are more crucial: do implicit environment prices exist?; if yes, who gets the payments?; to which income class do they belong? If one takes the example of air quality in Swiss residential areas, then these three questions must be answered as follows. We can observe implicit environment prices (Iten, 1990; Jeanrenaud et al., 1993; Pommerehne, 1987b). The payments are a part of the landlords revenues; this group belongs to the higher income classes (Buhmann, 1988; Ernst, 1983). As a result the conclusion is: environmental measures which improve the air quality in Swiss residential areas favour the upper classes and, consequently, are not socially just. The following will complement the established effects of distribution. Longand short-term effects are to be distinguished price rigidities lead to time lags and prevent price reactions in the short run, which is why the residents can be the only beneficiaries in the short run. For house owners it is impossible to skim off the total consumers surplus (Spillmann, 1994). The residents, or the environment consumers, keep a certain part, therefore they are not indifferent to environmental measures in their area. Simulation For the enforcement of environmental measures it is important that the extent of the socially unjust distributional effects are not too large. The following case will give an answer to the question about the size of distributional effects: fuel price increases for the purpose of reduced traffic agglomeration. The gap between two Gini-coefficients, one before and one after the price increase, indicates the amount of redistribution. The Gini-coefficient before the gas price increase (see Table III, first column) is calculated by tax data. The Gini-coefficient after the gas price increase (see Table III, second column) requires a simulation calculation. Assuming a price increase for gas of 80 per cent and for diesel of 133 per cent and, furthermore, a price elasticity of 0.25 for passenger transport and of 0.15 for freight transport, the price increases reduce the traffic by 20 per cent. According to an emission model for the city of Bern (Knzle, 1991) the reduced traffic could reduce the NO2-values by between 5-10 g/m3 in the different regions of Bern. These physical benefit

increases must eventually be transformed into an income increase, namely into a Social justice and monetary sum. For this, Itens (1990) empirical valuation is useful. He estimated environmental the willingness-to-pay of residents in Zurich for better air and less noise. policy The calculated income increases influence the income distribution. If we add the calculated amounts to the incomes of the residents in Bern, we would not take into consideration the existence of implicit environment prices. Therefore, we 9 have to add the amounts to the incomes of the respective house owners[3]. This leads to a new income distribution, which takes into considerations market and price effects (see Table III, third column). Table III shows the importance of considering price effects. If we pay no attention to market reactions as the segregation argument does the Ginicoefficient would decrease and incorrectly imply a levelling out of the income distribution. But if we consider that environment goods are supply oriented public but demand oriented private goods, we observe a rising coefficient, which emphasizes a more concentrated and therefore an increasingly more unjust distribution. An unwelcome redistribution can be cancelled out by transfers between different income classes. If environmental policies also have the intention of cancelling distribution effects[4], then the poor half (income below the median) would: receive 280 Swiss francs from the rich half, if price effects are taken into consideration; have to pay 75 Swiss francs to the rich half, if price effects are not taken into consideration. This calculation once again clarifies the importance of market reactions and price effects respectively; the importance of the fact that environment goods are demand-oriented private goods. An improving environment quality may lead to a socially unwelcome distribution effect not only because of a regressive effect of the fuel price increase (Harrison, 1994) but also due to the fact that the benefit increase of environment consumers will be partially skimmed off by house owners or by employers. Summary Are the distributional effects of environmental measures just? In answering this question we normally use the following argument: poor people live in highly polluted areas, therefore environmental measures which reduce the pollution must be socially just. Yet, the environment is not a public good as is often assumed. The consumers also pay prices for environmental goods. However, these prices are not explicitly, but rather implicitly, visible. Examples of such environmental prices are the extra
Status quo Gino-coefficient Median (Swiss francs) 0.4036 31,650 Without price effects 0.4025 32,054 With price effects 0.4073 31,785 Table III. Quantified distribution effects

rents for houses with a nice view, healthy air quality or a low noise level. The International Journal of Social crucial point for distribution analysis is the reaction of the markets and in the long term by no means the geographical segregation of income. Economics 22,3 Notes

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1. We are discussing use-values and not existence-values of the environment. 2. See Iten (1990), Jeanrenaud et al. (1993) and Pommerehne (1987b): they estimate pricefunctions for the regions Basel, Zrich, and Neuchtel respectively. They establish a statistical significant influence of the noise level or the air quality on rents in the residential areas. 3. Due to the impossibility of a complete skimming-off of the residents benefits, it is considered that residents with a high willingness-to-pay, or a high income, keep a certain part and residents with a low willingness-to-pay, or a low income, lose more than their benefit increase. 4. This means, for the calculation, the gini-coefficient has to go back to its former level. References and further reading Baumol, W.J. and Oates, W.E. (1990), The Theory of Environmental Policy, 2nd ed., Cambridge University Press, Cambridge. Buchanan, J.M. (1965), An economic theory of clubs, Economica, Vol. 32, February, pp. S. 1ff. Buhmann, B. (1988), Wohlstand und Armut in der Schweiz, Regger, Grsch. Cropper, M. and Oates, W. (1992), Environmental economics: a survey, Journal of Economic Literature, Vol. XXX. Ernst, U. (1983), Die Wohlstansverteilung in der Schweiz, Regger, Grsch. Freeman, A.M. (1972), Distribution of environmental quality, in Kneese, A.V. and Brower, B.T. (Eds), Environmental Quality Analysis, Johns Hopkins University Press, London, pp. S. 243ff. Getz, M. and Huang, Y-C. (1978), Consumer revealed preferences for environmental goods, Review of Economics and Statistics, Vol. 60, pp. 449-58. Harrison, D. (1975), Who Pays for Clean Air?, Ballinger Publishing, Cambridge, MA. Harrison, D. (1994), The Distributive Effects of Economic Instruments for Environmental Policy, OECD, Paris. Iten, R. (1990), Die mikrokonomische Bewertung von Vernderungen der Umweltqualitt, Dissertation, Schellenberg, Winterthur, Zurich. Jeanrenaud, C., Grosclaude, P., Soguel, N. and Stritt, M-A. (1993), Cots Externes du Trafic Urbain. Une Evaluation Montaire pour la Ville de Neuchtel, Bericht Nr. 42 des Nationalen Forschungsprogramms 25 Stadt und Verkehr, Zurich. Kunzle, T. (1991), NO 2-Immissionsmodellierung Stadt Bern, Geografisches Institut der Universitt Bern, Bern. OECD (1989), Environmental Policy Benefits: Monetary Valuation, OECD, Paris. Pommerehne, W.W. ( 1987a), Prferenzen fr ffentliche Gter, J.C.B. Mohr, Tbingen. Pommerehne, W.W. (1987b), Lvaluation des gains et des pertes damnits: Le cas du bruit provenant du trafic, in Burgat, P. and Jeanrenaud, C. (Eds), Services Publics Locaux, Economica, Paris. Spillmann, A. (1994), Soziale Gerechtigkeit im Umweltschutz, Regger, Zrich. Tiebout, C.M. (1956), A pure theory of local expenditures, Journal of Political Economy, Vol. 65, pp. 416-24. Zimmerman, K. (1985), Umweltpolitik und Verteilung. Eine Analyse der Verteilungswirkungen des ffentlichen Gutes Umwelt, Erich Schmidt, Berlin.