June 30, 1989
"A Market for Pollution - Incentives could Encourage Business to Beat Standards"
San Jose Mercury News
By Timothy Taylor
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POLLUTION standards for industry have one of the same problems as ethics standards for politicians: They impose penalties for playing too dirty, but provide no incentive to be as clean as possible. Such standards only require that businesses tiptoe down the correct side of the legal line.

If society wants profit-making businesses to focus on reducing pollution as far as possible, it has to provide incentives. Since the federal government is not about to start laying out billions of dollars in anti-pollution subsidies, the incentives can only come through private markets. This logic is popularizing an unlikely-sounding idea -- the creation of markets to buy and sell pollution rights.

George Bush's recent proposals for cleaner air, for example, rely heavily on setting up markets to trade pollution rights.

Here's one example: Bush's plan would require the nation's 107 dirtiest coal-fired plants to reduce their emissions of sulfur dioxide by about half in the next decade. Plants that reduce pollution by more than that, or faster than Bush's schedule, could sell the "pollution rights" to other companies that were behind in cutting pollution.

A second example: A top EPA official announced last week that instead of enforcing a stricter emissions control standard on every individual car, Bush would propose that a company be allowed to sell cars that would violate clean-air standards if, at the same time, they sell super-clean cars that exceed the standards by some specified amount. Companies that sold a lot of super-clean cars could sell the pollution rights to other companies that were selling dirtier cars.

Although the Environmental Defense Fund was closely involved with drawing up Bush's proposals, other environmentalists have been lining up to take potshots at these sorts of proposals. Their criticisms are misguided, but rhetorically powerful.

One objection is that it doesn't make sense for a car company to get credits for selling super-clean cars in Boise, Idaho, and use those credits to sell dirtier cars in San Jose. But this criticism only applies to foolish ways of setting up pollution markets, not the idea of a market.

Of course, trading of pollution rights must happen within defined geographic areas. For auto emissions, the appropriate limit might be a single metropolitan area. For coal-fired utilities, it might cover several states.

Perhaps more to the point, some environmentalists are concerned that markets in pollution rights will avoid reductions in pollution. Others are morally offended by the whole notion of a company being able to sell a permit to pollute. When Bush's proposal for auto emissions trading became public, for example, the Mercury News quoted one critic saying that it was a "sellout" and "a loophole big enough to drive a truck through."

There is a philosophical conflict here. Traditional environmental law has tried to define and enforce pollution standards that get tougher over time. This "command and control" system (as economists call it) has a strong gut-level appeal to many environmentalists, especially to those who are reflexively hostile to private industry.

But a market-oriented environmental law can mandate exactly the same overall reductions in pollution as a command-and- control law. The only difference is that it also encourages businesses to beat the standards. Given that the overall level of pollution is the same either way, do you want auto companies to have an incentive to invest a lot of money into trying to produce super-clean cars? Given that utility emissions will be reduced either way, do you want to reward companies that clean up faster than others?

In fact, Bush's proposals might even allow environmentalist groups to buy pollution rights and then refuse to sell those rights to any company, thus allowing private groups to reduce pollution directly!

Market-oriented environmental ideas do appear to be spreading. Deposits to encourage people to collect and return bottles (although they're set too low in California) are one example. If California farms were charged more for water, they would have an incentive to cut the amount of water they draw out of California rivers and reduce the amount of polluted runoff water. When federal law dramatically cut the amount of lead in gasoline from 1982 to 1987, it was under a program that allowed gasoline refineries to trade pollution credits.

There are even some indications that the Bush administration may try to set up a system of tradable pollution permits to help phase out chlorofluorocarbons, one of the nasty gases in the greenhouse effect.

The high levels of pollution and environmental destruction in countries all around the globe prove that pollution is not just a disease of capitalism. Instead, pollution is a byproduct of how people try to make a living. It happens when people benefit from activities which cause pollution, but do not have to pay the environmental cost.

A market for pollution will help to reduce the opposition between making a profit and creating pollution. Market-oriented environmentalism puts the profit motive to work for a cleaner environment.

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