ESD Thesis Defense – Samudra Vijay

The Role of Technology and Market-Based Policy Instruments in Reducing Industrial Air Pollution in Mexico City

Abstract:
Technology plays an important role in dealing with the air pollution and other environmental problems faced by developing and developed societies. Severe air pollution in the Mexico City Metropolitan Area (MCMA) and roles of different point and area sources has been the prime-motivating factor for this research. Environmental standards for most of the criteria pollutants have frequently been violated in the MCMA. Industrial sources of air pollution play a significant role in aggravating the air pollution problem in the MCMA.

This research focuses on a 25-year horizon for socio-economic growth of the MCMA, and its implications on air emissions from the industrial sector. Specifically, I develop a simulation model to estimate energy demand and emissions scenarios from industry sector in the MCMA. The model incorporates change in the industrial output, the structural shift in the industry, control technologies, fuel-switching, technological progress, etc.

I find that the level of industrial activity, driven by the macroeconomic indicators, plays a significant role in shaping the long-term air pollution profile from industries in the MCMA. Purely technological, end-of-pipe controls are cheap, in relative terms, as compared to the total value of production by the industrial sector, but expensive in absolute terms. Policy maker’s choice of instruments is highly dependent on which measure of cost is considered in the decision-making process. The set of options which look attractive when only capital cost of the control technologies and investment in renewal of the production stock is considered, are no longer preferred when total policy cost is considered.

When only capital cost is considered “de-industrialization” dominates the list of cost-effective options. However, when total policy cost of options is considered, end-of-pipe emission controls look viable options. I use a sectoral abatement approach to look at the cost-effectiveness and estimate the potential cost savings from market-based regulatory instruments in achieving emission reductions. I find that the savings from using flexible, market based mechanisms are too great to ignore in the policy debate over choice of command and control regulatory instruments to achieve air pollution abatement goals.

I conclude that scenario analysis indicates that technology options alone are not sufficient to meet the air pollution abatement goals from industrial sources in the MCMA. The structural shift from high energy intensity industries to low energy intensity industries, and moving the industrial activity away from the MCMA, should form an integral part of the policy making process, along with end-of-pipe emission controls. Market-based instruments present a significant opportunity to achieve the emission reduction goals in an economically efficient manner.