Policy design in the context of multiple pollutants and regulators

Different regulatory bodies tend to develop environmental policies not recognizing the interdependencies between externalities. For example, one authority may regulate a stock pollution and another a flow pollution that result from the same activity. This study introduces a two-phase optimization approach to design policies to control interdependent externalities problems by deriving a separate shadow price for each of the externalities. The paper demonstrates that the presence of one externality magnifies the efficiency losses of the other externality, and that taxing each externality independently of the other leads to excess taxation. The analysis demonstrates how an authority has to adjust its regulation of an externality if a second authority already established a policy to regulate the other externality. Based on the interdependence of global warming and local air pollution as a result of CO2 emissions, a review of the results of integrated assessment model shows that the overall tax burden of both externalities offers a saving potential of 9-12%. For metropolitan entities the saving potential for a tax to control local air pollution is likely to clearly be in the two-digit percent range if they take account of a national tax to control for climate change