April 2005 Issue
Trading The Right To Pollute
Cullen Roberts '08and Jesse Roisin '05
The monolithic argument frequently proposed by environmental activists exalts the danger of possible climate change over the very real human consequences of economic collapse. In the radicals' eyes, any possible environmental benefits ensuing from Kyoto far outweigh the resultant economic hardship and social ills. If the United States and other developed countries hobble themselves on a productive level while giving a free ride to such developing countries as China and India, the already precarious trade dynamic will only become more imbalanced. An economic slowdown on such a scale would lead to rising unemployment, resulting in increased crime and general social unrest. Developing countries would fill the production gap, unencumbered by environmental standards.
The Kyoto Protocol drafted over seven years ago came into force in February. Briefly, it is an agreement among most developed countries to reduce the amount of greenhouse gases they emit. The goal is to reduce these emissions by 5.2 percent of their 1990 levels by 2012. Two nations, however, have refused to ratify this agreement. The United States and Australia note that the concept of a global community extends beyond the simple emission of gasses to the complex competition inherent in a modern world powered by production and trade, yet governed by responsibility and sustainability. The latter two are particularly important to building a healthy planet for all. Yet the conspicuous omission of China and India from Kyoto demonstrates a fundamental misunderstanding of global economic dynamics.
Arguably, such a scenario is not very likely to occur. Yet the basic disconnect between the 1997 Kyoto proposal and the real global economic community of today remains and must be addressed. A few basic principles need to be laid out before we examine possible solutions to this impasse. Yes, climate change is occurring. The global temperature has risen by one degree Celsius. The debate is not whether there is a change, but rather as to its cause. A systemic global climate change has historically been the scapegoat, notably during Europe’s little ice age, as well as other temperature oscillations until the 1970s.
During the past few decades, it has become increasingly popular to attribute this miniscule increase in temperature to human activity, notably such pollutants as greenhouse gasses. But these gases have not been proven to be the cause – only correlation. Carbon dioxide is bad for the environment, but are we to believe that it is causing catastrophic climate change? Are we prepared to trade our standard of living to developing countries such as China, so they can begin their own contribution to global pollution? It seems that this violates basic standards of fairness. As an alternative, we propose a syncretic approach to this dilemma. The concept of a global community is valuable, for it allows us to visualize the intense interdependence of the modern ecosystem. Yet on an economic level, this interdependence, tempered with competition, presents us with a vibrant and complex system of the highest order. In short, we must recognize that economic and environmental progress are inextricably linked. In fact, the Kyoto protocol allowed for this important step in its recognition of “cap and trade” practices. We propose that if such a system were to be adopted on a global level, without exception, it would be an invaluable tool towards achieving a cleaner environment without the lamentable economic impact on manufacturing and trade. A global cap and trade policy can be implemented to reduce total greenhouse gasses.
Cap and trade policy, at its purest, captures the power of the market to efficiently achieve pollution goals. The goals do not change; cap and trade merely alters the means by which these pollutions reductions are achieved. Understanding cap and trade, however, requires a basic understanding of pollution regulatory policy in general. The government regulates pollution because there is no market for pollution. Damages caused by pollution are spread over society as a whole, so firms have no incentive to cut pollution. Moreover, firms that pollute do so because it is the least expensive way to deal with the byproducts of production. Reducing pollution, therefore, costs money, and companies engaging in such a reduction would not be able to compete with their more heavily polluting counterparts. Consequently, government regulation is necessary to moderate pollution.
However, the goal of regulation is certainly not to end all pollution. It is to reduce it to levels the environment (and people) can deal with. This way, society can balance a relatively clean environment with the services and goods of an industrialized world. Prosperity and ecology are not mutually exclusive. Various regulatory tools are at the disposal of the government to achieve these reductions. In the past, these have predominantly consisted of command and control regulations or pollution taxes. In command and control regulation, a government agency mandates that specific firms use specific emissions control equipment (mostly, scrubbers on smokestacks). Frequently, the agency will specify how much effluent can be released from each point source within a firm’s factories. Needless to say, this central planning style environmental protection results in an expensive bureaucracy, wastes time, and spurns innovations that might provide more efficient means of pollution reductions than scrubbers.
Cap and trade policy, however, solves the problem of pollution by making a market for it. In practice, the government auctions a set number of certificates, each allowing the production of a quantity of a specific pollutant. The companies can barter, sell, and buy these certificates from each other after the government initially releases them. This allows companies the flexibility to develop cost efficient reduction methods. Consequently, if Firm A can cut pollution cheaply, and Firm B cannot (as is frequently the case), Firm A will sell some of its credits to Firm B, benefiting both. In the liberal command-and-control scenario, this exchange would not be allowed; Firm A would only reduce pollution the minimal amount, and Firm B would be forced to make expensive and unnecessary alterations—and the overall pollution level would be higher. Also, the market creates an incentive for innovation. If a company can develop a novel technology to cut pollution, it can sell the credits saved through this idea to another company to make a profit, and again reduce the overall level of pollution.
It is important to note that pollution reductions are absolutely achieved. No one can pollute more than the certificates to allow, and since the total number of credits in the market remains fixed, total pollution does not exceed goals. It simply means that pollution is distributed efficiently among different firms. To ensure compliance, stringent and comprehensive emission monitoring requirements are implemented on all sources—as they are today.
Now, environmentalists voice concern that health damage will be done if too many companies emit waste in too small an area. This is a legitimate concern, but one that is easily avoided. The fear is that if a company or cluster of companies in one location purchases an abundance of credits, the pollution may reach toxic levels in that location even if total national reductions are achieved. This is the case for some toxins, such as neurologically deleterious mercury oxides. However, most pollutants, such acid rain causing sulfates and the putative global warming gasses, only affect a larger area. Macro-level reductions are the only thing that matter. For the more toxic pollutants, cap and trade will work if the government places a maximum on certificates per a certain area.
Prototypal cap and trade policies have already been in effect for some 25 years. The Clean Air Act of 1990 allowed a less comprehensive pollution credit system and reduced costs to the economy significantly. This was the first step to the more comprehensive cap and trade style policy, currently being implemented by state governments and the US federal government.
Some environmentalists lament that no company should have the right to pollute. This is an outrageous objection, since pollution is a necessary byproduct of production. Also, nature can accommodate and counter certain levels of pollution. Likewise, low pollution levels are harmless to humans. Therefore, environmental protection is a purely pragmatic endeavor. Whatever policy can keep pollution to a manageable level with minimal economic side affects should be adopted. Because a cap and trade policy, which allows companies to trade pollution “rights,” is the most efficient means to reach any pollution reduction goals, it is the right policy to adopt and expand.