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---December 10, 1998---
SUSTAINABLE DEVELOPMENT -- Part 5: Emissions Trading
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Sustainable Development -- Part 5: Emissions Trading

As we saw in Rachel's #625, there are 3 problems facing every economy: resource allocation, fair distribution, and tolerable size.

Resource allocation means deciding what the economy should make -- more automobiles, more nursing homes, or more chocolate truffles, for example. We can't make everything we might want, so we must make choices. In the U.S. and other "market economies," allocation is handled mainly by "the market," meaning the system of prices. Prices send signals to manufacturers to make more of this and less of that, according to what people want and can afford to pay for.

Fair distribution means just what the words say --distributing the benefits of the economy with fairness and justice. The market has no inherent ability to do this. Left alone, the market will tend to make the rich richer and the poor poorer until a small number of people ends up owning just about everything. To achieve a fair distribution, people must make political decisions about what's fair, and about how to achieve their goal of fairness. One formula for fairness, endorsed by economist Herman Daly, says that high-income people should only make about 10 times as much as low-income people.[1] There are precedents for such a limit in American society. Approximately 10-to-1 is the range of pay in federal civil service jobs, and in our military. A general makes about 10 times as much as a private. A 10-to-one ratio allows hard-working, ambitious people to earn 10 times as much as people who prefer to take it easy and enjoy life. (And fixing the relationship between the bottom and the top would give the high-income people an incentive to favor raising the incomes of the low-income people because it would be the only way the high-income folks could increase their own income without violating the 10-to-1 rule.) The way to achieve a fair distribution (once you've decided what's fair) is conceptually simple: transfer payments. Tax the haves and transfer the money into the hands of the have-nots. Transfer payments can take various forms --you could simply write checks to the have-nots, or you could provide jobs that pay wages, for example.

The third problem --how large should the total human economy be --has never been considered a problem until very recently (although British economist John Stuart Mill did write about it in 1857). Until very recently, the world looked as if it could support an endless expansion of the human economy. But in recent decades, signs of serious trouble have emerged. In particular, it has become apparent that the world is running out of (or, more accurately, already has run out of) the capacity to absorb industrial wastes safely. The buildup of carbon dioxide and chlorofluorocarbons (CFCs) in the atmosphere, and mercury in fish, are three examples of this problem. It is now apparent that there is some optimum size for the human economy --a size that will provide a sufficient quantity of goods (sufficient to allow "the good life"[2]) for the greatest number of people, world without end. If the economy grows beyond that optimum size, it will begin to produce bads (such as toxic fish) faster than it produces goods, and we (and future humans) will be deprived of some of the benefits we enjoy today. There is a good chance that the total human economy has already exceeded the optimum size and that further growth in throughput will do more harm than good. ("Throughput" means materials and energy flowing through the economy --people making more stuff and using energy to do it.)

The size of the economy has never been considered a problem for two main reasons: 1) until recently, the world has always seemed nearly empty from a human viewpoint; and 2) even when the size of the economy began to cause obvious problems, people did their best to ignore the signs, to avoid facing uncomfortable choices. An end to growth is literally unthinkable for most people --especially for Americans -- because growth has always been our main method for achieving a fair distribution. We have always been able to argue that poor people would be better off next year because their slim piece of the pie would grow a bit larger as the total pie expanded. Thus we have advocated more growth instead of confronting the question of a fair distribution of benefits. In other words, throughout our history we have substituted growth for politics. Once growth is removed as our all-purpose problem- solver, we will have to face squarely the problem of fair distribution. This is very likely to cause serious disagreements and perhaps even strife. It could get ugly.

As we (in the industrialized world) think about ways to make the transition from our present economy to a steady-state economy in which throughput is no longer growing, a necessary step is to become more efficient. Efficiency is politically acceptable to nearly everyone. Efficiency means cutting waste, learning to do more with less. Who could be against that? For a time, improved efficiency can give us the same benefits that we used to get from real growth.

So how do we cut waste for the least cost? Most economists favor a system called "tradeable pollution permits" also known as "emissions trading." As we will see, many (but not all) environmentalists oppose tradeable pollution permits. Most economists, including Herman Daly, favor them.[3] However, Daly favors them for reasons that are different from the reasons given by most economists.

Tradeable pollution permits are a simple idea. First you decide how much total waste (pollution) to allow in an area. Second you create "rights to pollute" which, taken together, add up to the desired total pollution, and you establish initial ownership of those rights. The third step is where the market comes in. Some people (or corporations) can reduce pollution more cheaply than others. Those for whom reduction is cheap will proceed, thus freeing up some number of unused "rights to pollute." Those rights can then be purchased by firms for whom genuine reduction would be expensive. This scheme promises to provide society with the desired level of total waste (pollution) at the least cost. So far so good.

Herman Daly likes this plan for one main reason: the process of issuing tradeable pollution requires society to confront each of the three economic problems separately: sensible allocation, fair distribution, tolerable size.

The problem of tolerable size must be confronted first: how much total pollution is tolerable? The market has nothing to say about this question. It is a political question. How many sick people is acceptable? How much crop damage caused by air pollution is OK? How many mercury-poisoned fish will we tolerate?

Once that question is settled, then we move to the matter of fair distribution. How should initial ownership of "rights to pollute" be distributed? What is fair? Here again, the market provides no help. This is strictly a political question that citizens must decide among themselves, based on ethics.

Should polluters automatically receive the right to pollute at their current level? This rewards polluters by freely giving them a public good (the capacity of the ecosystem to absorb wastes). Furthermore, it provides the biggest rewards to the biggest polluters. This hardly seems fair. (This is the system that Congress, with help from the Environmental Defense Fund [a mainstream environmental organization], wrote into the Clean Air Act, and this is the system that the U.S. government favors in negotiations over the Kyoto agreement on global warming.)

Another way to distribute pollution rights would be to declare them, collectively, a public good and auction them off to the highest bidder. This has the disadvantage of favoring the wealthy (many of whom made their fortunes by polluting). This doesn't seem completely fair either.

A third way to distribute pollution rights initially would be to give a small pollution right to each citizen in the affected area. Citizens could then dispose of their personal right any way they wanted --they could sell it to a polluter who could use it, or they could retire their right and thus provide a little cleanup.

After the political problems have been solved (establishing the total pollution desired, and making a fair distribution of initial pollution rights), then the market can handle the problem of allocating pollution in the most economically efficient manner (as firms and individuals buy and sell each other's rights according to their circumstances). At least that's the theory.

On paper it looks good and Herman Daly is right: tradeable pollution permits expose three separate economic questions to public scrutiny, in the process revealing that the market has a relatively minor role to play in the overall scheme. The political questions are much larger and more difficult than the question of buying and selling pollution rights, and the market has nothing to do with them.

In actual practice, however, tradeable pollution permits have proven to be a very unfair way to allocate pollution,[4] and there is evidence that they do not always reduce pollution. In some instances, they may actually increase it.[5]

Here are some obvious problems with pollution trading schemes in actual practice:

--Peter Montague
(National Writers Union, UAW Local 1981/AFL-CIO)

  1. Herman E. Daly, Beyond Growth (Boston: Beacon Press, 1996). ISBN 0-8070-4708-2. See pages 202-203.

  2. Daly (cited above in note 1) never precisely defines the "good life" but on pg. 14 he says, "...most would agree with [British economist Thomas] Malthus that it should be such as to permit one to have a glass of wine and a piece of meat with one's dinner. Even if one is a teetotaler or a vegetarian that level of affluence is desirable, and would serve by itself to rule out populations at or above today's level. What really must be stabilized is total consumption, which of course is population times per capita consumption. Both of the latter factors must be reduced."

  3. Daly, cited above in note 1, chapter 2.

  4. Michael Belliveau, "Smoke and Mirrors: Will Global Pollution Trading Save the Climate or Promote Injustice and Fraud?" available at And see Michael Belliveau, "Trading Places --Lethal Lessons from Los Angeles," and "Beltway Bandits --Pollution Trading as National Policy," at Michael Belliveau directs Just Economics for Environmental Health, P.O. Box 806, Montara, California 84037; telephone (650) 728-5728.

  5. Arjun Makhijani, "A Gamble on Global Warming," Washington Post November 3, 1998, pg. A17. Arjun Makjijani is president of the Institute for Energy and Environmental Research, Suite 204, 6935 Laurel Avenue, Takoma Park, MD 20912; telephone (301) 270-5500. Dr. Makhijani describes a situation in India in which a pollution permit program might increase, not decrease, pollution.

  6. Our thanks to David Zwick, the director of Clean Water Action, for sharing an insightful internal memo titled "Pollution Trading" that he co-authored with Paul Schwartz, in October, 1998.

Descriptor terms: pollution trading; emissions trading; tradeable pollution permits; edf; economy; herman daly;

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