According to the Gothenburg protocol, Norway is committed to reduce its emissions of NOx to a level 30\% below the emissions in the base year 1990, by the end of 2010. Both Norwegian and foreign governments have made use of voluntary agreements with industries as a supplement or alternative to more traditional policy instruments. This thesis evaluates the Norwegian NOx-fund, as an alternative method to reduce NOx emissions compared to a standard tax system.
I start with a theoretical analysis using a standard tax model and compare it to a fund using an investment based funding system. If the tax is the same in the two cases, the investment in abatement technology would be greater in the fund system because of the subsidy for capital expenditures given to the firm. However, the two taxes are not equal, and the same optimal solution could be reached in the two cases. As we know that the subsidy given to the firms varies a lot, this suggests that a fund system will not provide equal marginal abatement costs between firms, and abatement will not be cost efficiently distributed.
Later on, I expand on the theoretical model and introduce hidden information about the firms marginal abatement cost. The main result in this model is that a first best optimum is impossible to reach when the firms have information power over the fund, and information rent has to be paid to the most efficient firm. Therefore a lower level of abatement is reached at a higher cost in the second best solution.
I analyze the fund by looking at the marginal abatement cost curve using data from both implemented and planned abatement projects. There are several types of new investments in NOx reducing technology, which I classify into seven different categories. Here I find that the marginal cost of the projects differs a lot between different initiatives, and also within each category. I see that the most cost efficient initiatives which also contribute to high abatement levels are fuel saving, selective catalytic reduction (SCR) and motor technical rebuilding, and I focus my analysis on these categories of NOx reducing technologies. We see that the most efficient initiatives also are among the majority of the funded projects from the NOx-fund.
There could also be political explanations for not reaching the first best level of abatement. As lobbying from interest groups might affect the government's preferences in maximizing welfare, this could lead to environmental policy not maximizing the NOx reduction at the lowest possible costs.
Finally, I present a few different scenarios scenarios for implementation strategies of NOx reduction technologies. I have looked at the three most cost efficient categories, and I assume it is possible to double the number of potential projects if one has a longer time perspective. This implies installing these NOx reducing technologies into 40\% of the Norwegian trade fleet. I find that it would have been possible to reach the same level of abatement as what is reached today, at a total cost 39\% lower than the present cost level, if twice as many of the SCR, motor technical rebuilding and change to gas projects were added to the already existing projects. Instead of reaching the level of 26 078 tons of NOx abatement at a total cost of 399 million NOK, it could have been reached at a total cost of 244 million NOK. In a more modest scenario, I find that the same level of abatement could be reached at a total cost of 321 million NOK, 20\% cheaper than today. This is the case if only the same three projects were carried out. As new investments only are profitable when they are in dock for other maintenance purposes, this might suggest that one needs more time in order to reach a more cost efficient solution.