By Harold Henderson
Economics professors have long dreamed of putting a price on pollution. But that dream has only just begun to affect reality. Most environmental laws still simply say, “Don’t put out more than two million tons of crud a year” or “Install a catalytic converter on every car.” These laws do reward ingenuity–the kind of ingenuity that enables a company to put out exactly two million tons of crud and not a pound less, or the kind of ingenuity that installs the cheapest catalytic converter you can get away with. Sandor argues it would be better to write laws that would reorient the game by building a set of incentives that reward businesses for cleaning up more rather than less.
Sorry, Fred, but to understand emissions trading is not necessarily to love it. Advocates often overstate its virtues. Like gearheads who can discuss the fine points of horsepower, trading advocates are fascinated by detailed market mechanisms, but they tend to gloss over the unavoidable ethical dilemmas those mechanisms pose. For instance, well-designed markets can accomplish social goals and make everyone better off, but they don’t make everyone equally better off. Many environmentalists and many developing countries agree with the Indian daily the Hindu, which on March 10 condemned carbon dioxide emissions trading as an attempt by the U.S. to “bind [us] in environmental colonialism in order to protect its own luxury interests.”
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In 1990 Congress wanted to reduce the sulfur dioxide pollution being spewed out by electric utilities (which contributes to acid rain). To accomplish this goal, it could have told each plant what to do and how to do it (“Cut your sulfur dioxide emissions in half by installing scrubbers”). Command-and-control regulations like this ensure that some cleanup gets done, but they don’t ensure that it gets done in the most efficient way, especially given how fast new technology comes along. President Bush wanted to try a more flexible approach, and Congress was eventually persuaded to pass the Clean Air Act Amendments of 1990.
Think of the cap as 8,950,000 “Get Out of Jail Free” cards. Each card, called an “allowance,” is good for one ton of sulfur dioxide coming out of a smokestack. Every year the U.S. Environmental Protection Agency deals the cards to each plant for free. The plants can then buy and sell the cards however they choose. The EPA monitors how much sulfur dioxide comes out of each plant, and at the end of the year each plant must give the EPA one card for every ton of sulfur dioxide it put out or face a stiff automatic fine. The EPA doesn’t care where those cards come from or how long the plants have held them.
The politics behind the Acid Rain Program have been questioned, in particular the decision to give, not sell, allowances to existing polluters. Was this fair? Shouldn’t they have had to pay something? Maybe, but making them freebies may have been the political price for getting emissions trading through Congress. In his forthcoming book Emissions Trading: Environmental Policy’s New Instrument, Richard Kosobud, an economist at the University of Illinois at Chicago, says that the electric utilities might not have agreed to emissions trading in 1990 if they hadn’t been assured of getting free allowances to start with.
All these things might have happened whether or not Congress had passed the Acid Rain Program in 1990. But trading advocates believe that they happened sooner because emissions trading created a demand for them. Dallas Burtraw of the Resources for the Future think tank writes in a recent paper, “What were previously independent factor markets supplying services to utilities (coal mining, rail transport, and scrubber manufacturing) were thrown into competition with each other by the program’s flexible implementation. This unleashed competitive pressure to find ways to reduce costs in all these markets.” At the very least, Kosobud adds, the Acid Rain Program allowed utilities to take advantage of these new options more easily once they appeared. So Illinois Power was free to cancel its order for scrubbers when it saw lower clean-coal prices.
