| Tradeable Pollution Rights in Practice | |
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Little analysis of how emissions trading actually affects the environment has been undertaken. But a study undertaken by Hahn and Hester (1989) in the USA, the first of its kind, found that emissions trading did not improve the environmental quality; instead, it saved money for industry. This is hardly surprising, since one of the key motivations for the development of marketable permit systems was the potential for cost savings. The benefits of economic instruments are far more theoretical than real. The use of charges have not been shown to provide incentives for innovation and pollution reduction measures and the use of tradeable pollution rights, used widely only in the US, has not led to significant environmental quality improvements. The most often cited success case is the use of tradeable pollution rights for removing lead from petrol between 1982 and 1987. Whilst proponents claim it saved petrol refiners hundreds of millions of dollars those same proponents admit it "appears to have had very little impact on environmental quality... In Canada, lead in gasoline was eliminated by gradually raising standards set out in traditional regulations." (Cassils 1991, 10). One of the key motivations for the development of marketable permit systems was the potential for cost savings to polluters. An OECD report states that: More consensus seems to exist regarding advantages of emissions trading in terms of economic efficiency than with respect to its environmental effectiveness. Substantial cost savings are reported by many authors on this subject. An important advantage of emissions trading over direct regulations is that it has facilitated continuous economic growth in dirty areas. (OECD 1989, 118) For example, the chemical company Du Pont has estimated that its fifty-two plants achieved cost savings of over 86 per cent from the use of regional bubbles (Senecca and Taussig 1984, 232). But often cost savings arising from economic instruments result directly from firms not having to make pollution reductions that they otherwise would have. A study by economic instrument advocates Hahn and Hester (1989, 129) found that emissions trading, although it saved money for industry by enabling firms to "avoid making emissions reductions that they otherwise would have been required to make" did not improve environmental quality. One of the problems with emissions trading is setting the level of emissions that individual firms should have a right to attain before trading can occur. If the baseline level is too low, there will be few pollution rights for sale because few firms will be able to reduce their pollution levels below the standards set. However, if the baseline level is too high, there will be few buyers of pollution rights because most firms will be able to meet the standards. In either case, there will be too little trading. A major question is whether the baseline levels should be set to meet environmental goals or to ensure a high level of trading and cost saving. Environmentalists have been opposed to emission trading partly because they fear that environmental objectives have been sacrificed for economic efficiency. Even proponents of trading admit that there will inevitably be a conflict and an implicit trade-off between the goals of reducing costs and improving environmental quality. They argue that the US EPA's concern with improving environmental quality has in fact hampered the effectiveness of trading and limited markets. A major problem with the new EPA policy is that it reinforces the perception of a strong link between emissions trading and the achievement of air quality standards. This is especially apparent in the requirement for additional reductions for emissions trading in nonattainment areas … Requiring large additional emission reductions from firms using emissions trading simply creates another disincentive for firms to use trading. (Hahn & Hester 1989, p. 147) An OECD report (1989)points out that administrative costs of trading have been high. Other problems pointed out by Senecca and Taussig (1984) include the fact that few firms have taken part, so the market is made up of only a small number of buyers and sellers. In fact, although the emissions trading program was introduced in the USA in 1979, by 1989 far fewer firms than expected were banking credits or trading them with other firms. With so few firms in the market, it has been difficult for individual firms to get information about prices and terms. The baseline level is usually set in the USA by making it the same as existing licence limits. Opponents of emissions trading point out that these established licence limits have not enabled states to meet air quality goals and that, while further reductions in emissions are needed, surplus rights should not be traded. Proponents argue that the problems lie with the licensing system, and that these problems should not prevent cost savings being made through the use of emissions trading. Several states have set baseline levels on the basis of what a firm has been discharging in the past. But if a firm's actual emissions are overestimated, so that allowable emission rates are set higher than actual emission rates to start with (which, it has been argued, happens in many states in the USA), a firm may get credit for reductions it has not actually made. This is also one reason why offsets have not resulted in any noticeable improvement in air quality. 'Many offsets are created by revising the permit of an existing source to reflect an emission reduction that has already occurred' (Hahn & Lester 1989, p. 122). It is argued that these difficulties in working out baseline and actual emission levels also add to the uncertainties faced by firms in working out the credits to which they are entitled. The resulting lack of clearly quantified property rights acts as a disincentive for firms to create surplus-emission reductions and trade them. There is also uncertainty surrounding the issue of enforceability of emission ownership rights. Another problem is that, if the established baseline level is found not to be the ideal ultimate level, or if new information comes to hand that means the regulator has to tighten the air quality standards, this will mean that baseline levels will have to be reduced. How does that affect a firm's 'banked' credits? Would the government have to buy them back? Otherwise, according to Hahn & Lester (1989, p. 117), 'reductions that were once surplus would then be required, thereby effectively confiscating the property right held by the firm'. This also adds to the uncertainty of firms that may not be inclined to get involved for fear of having their banked credits devalued.
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© 2001 Sharon Beder