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#628 - Sustainable Development -- Part 5: Emissions Trading, 09-Dec-1998

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:

** Emissions trading moves pollution from one location to another. In
practice, this often means dumping more pollution on the poor and on
people of color.

** Setting the total desired amount of pollution assumes that risk
assessors can determine how much pollution is "safe" for humans and for
the ecosystem. Risk assessors have a notoriously poor track record of
making such estimates.

** Pollution trading requires careful monitoring and accounting of who
is emitting what. Governments, including the U.S. federal government,
typically rely on self-reporting by the polluters themselves, who have
a large monetary incentive to issue false reports.[4] Internationally,
there are no government agencies capable of accurately monitoring
thousands or millions of polluters. Monitoring by citizens would appear
to be the only practical solution to this problem, but no examples of
such a system exist on a large scale.

** Emissions trading will complicate a permit enforcement system that
already does not work. Until government can show that it can monitor
and enforce limits, emissions trading should not be implemented.

** An emissions trading system has no inherent, built-in incentives to
reduce pollution. Unless the system requires an annual decrease in the
total pollution allowed, emissions trading will simply lock in today's
pollution levels. Polluters need a constant incentive to reduce their
discharges toward zero, but emissions trading inherently offers no such
incentives.

** In accord with the principle that the polluter should pay, polluters
should be required to absorb the costs of the entire pollution control
system. Present systems give away the store to the polluters.[6]

--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
www.corpwatch.org/trac/feature/climate/pollution/belliveau.html. And
see Michael Belliveau, "Trading Places --Lethal Lessons from Los
Angeles," and "Beltway Bandits --Pollution Trading as National Policy,"
at www.corpwatch.org/trac/feature/climate/pollution/box.html. 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;