Page 202 - Environment: The Science Behind the Stories

activities. This is beginning to happen, but lobbying from 16
entrenched interests is keeping progress slow. Emissions after first year of
14 cap-and-trade program Allowances allocated
to recent years
We can harness market dynamics 12
to promote sustainability 10

With subsidies and green taxes, policymakers employ finan-
cial incentives in direct and selective ways. However, we may SO 2 emissions (million tons) 8
also pursue policy goals by establishing financial incentives 6
and then letting marketplace dynamics run their course. One
example is ecolabeling (p. 173), the practice whereby sellers 4
who use sustainable practices in growing, harvesting, or manu-
facturing their products advertise this fact on their labels, hop- 2
ing to win approval from buyers. In many cases, ecolabeling
has grown from initial steps taken by government to require 0
the disclosure of information to consumers. Once established, 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ecolabeling can spread in a free market as more and more Year
businesses seek to win consumer confidence and to outcom-
pete less sustainably produced brands. Another example of Figure 7.16 Permit trading has helped to reduce emissions
employing market dynamics for policy goals is permit trading. of sulfur dioxide by 67% since 1990. As of 2010, emissions
from U.S. sources participating in the program mandated by the
1990 Clean Air Act amendments had dropped well below the
Permit trading can save money amount allocated in permits (black line). Data from U.S. Environmental
Protection Agency.
and produce results

In the innovative market-based approach known as permit then, sulfur dioxide emissions from sources in the program
trading, the government creates a market in permits for an have declined by 67% (Figure 7.16), sulfate deposition has
environmentally harmful activity, and companies, utilities, or been reduced, and air quality and visibility have improved.
industries then buy, sell, or trade rights to conduct the activity. The 67% reduction in pollution was greater than the amount
To decrease emissions of air pollutants, a government might actually required by the legislation, offering evidence that
grant emissions permits and set up an emissions trading system. cap-and-trade systems can sometimes cut pollution more
In a cap-and-trade emissions trading system, the government effectively than command-and-control regulation. Moreover,
first determines the overall amount of pollution it will accept the cuts were attained at much less cost than was predicted
(i.e., it caps the total amount allowed) and then issues permits and with no apparent effect on electricity supply or economic
to polluters that allow them each to emit a certain fraction of growth. Savings from the permit trading system have been
that amount. Polluters may buy, sell, and trade these permits estimated at billions of dollars per year, and the EPA calculates
with other polluters. that the program’s benefits outweigh its costs by about 40 to
Suppose, for example, you own an industrial plant with 1. Other similar programs have also shown success, including
permits to release 10 units of pollution, but you find that you one in the Los Angeles basin to reduce smog (p. 473) and one
can make your plant more efficient and release only 5 units among northeastern states aimed at nitrogen oxides. CHAPTER 7 • Envi R onm E n TA l Poli C y : mA king D EC i si ons A n D s olving P R obl E m s
instead. You then have a surplus of permits, which might be Although cap-and-trade programs can reduce pollution,
very valuable to some other plant owner who is having trou- they do allow hotspots of pollution to occur around plants that
ble reducing pollution or who wants to expand production. In buy permits to pollute more. Moreover, large firms can hoard
such a case, you can sell your extra permits. Doing so gener- permits, deterring smaller new firms from entering the market,
ates income for you and meets the needs of the other plant, thereby suppressing competition. Nonetheless, permit trading
while the total amount of pollution does not rise. By provid- shows promise for safeguarding environmental quality while
ing companies an economic incentive to find ways to reduce granting industries the flexibility to lessen their impacts in
emissions, permit trading can reduce expenses for both indus- ways that are economically palatable.
try and the public relative to a conventional regulatory system. In recent years, emissions trading programs have begun
To lower emissions further, the government may reduce to address the greenhouse gas emissions that drive global
the amount of overall emissions allowed year by year. Envi- climate change. In the European Union Emission Trading
ronmental organizations may buy up permits and “retire” Scheme (p. 530), each participating nation allocates emis-
them, reducing the overall amount of pollution still more. To sions permits to its industries according to their emissions
see an illustration of how a cap-and-trade system works, jump at the start of the program. The industries then can trade
ahead to Figure 18.31 (p. 531). permits freely, establishing a market whereby the price of
A cap-and-trade system has been in place in the United a permit fluctuates according to supply and demand. In the
States, established by the 1990 amendments to the Clean Air United States, the Chicago Climate Exchange pioneered
Act (p. 476) that mandated lower emissions of sulfur dioxide, this approach, and carbon-trading programs are running
a major contributor to acid deposition (pp. 491–493). Since in California and among the northeastern states, although 201

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