Tradeable pollution rights and emissions trading
are being increasingly used as an environmental policy tool for pollution control.
It allows firms to trade the right to emit specific pollutants. Tradeable pollution
rights were originally developed in the USA to cut costs to industry and enable
economic growth to continue in highly polluted areas but they are increasingly
being used in other countries for air (Moore 1994) and water pollution (James
1994). They are now being proposed as a method for meeting Kyoto Protocol targets
for greenhouse gas emissions. Firms such as BP and Shell have already established
internal carbon trading systems (O’Brien 2000) and Canada has approved
a privately run internet-based greenhouse gas emission reduction exchange (KEFI-Exchange
2000).
However pollution rights trading, or emissions
trading, is aimed at minimising costs to firms rather than maximising environmental
gains and past experience has shown that the environmental gains from emissions
trading are far from guaranteed. This article seeks to expose the ways in which
the theory and application of economic instruments, and in particular tradeable
pollution rights, is shaped by the interests, values and ideologies of those
who are promoting and implementing them.
There are two main types of economic instruments
used in environmental policy, both of which aim to provide an incentive to use
resources sustainably:
• Price-based measures use
charges, taxes and subsidies to persuade polluters to reduce their discharges.
• Rights-based measures "create
rights to use environmental resources, or to pollute the environment, up
to a pre-determined limit, and allowing these rights to be traded"
(Commonwealth Government 1990: 14).
The rationale behind rights-based measures
is that environmental degradation results from incomplete ownership of rights
to use valuable resources. Proponents of rights-based economic instruments argue
that there is a strong tendency for people to overexploit and degrade common
property resources. In situations where the environment cannot be privately
owned, access rights or user rights can be owned. The idea of rights-based pollution
control measures is to grant or sell such rights and establish markets in them.
The market is then used to allocate a scarce resource–the capacity of the
environment to absorb pollutants–in the most efficient way. David James
(1991: 8), previously a Commissioner of the Australian Resource Assessment Commission,
says:
When factories, for example, dump organic
waste into streams they cause damage if their rights to use the assimilative
capacity of the resource are uncontrolled. The destruction of open-sea fisheries
through unrestricted harvesting, the pollution of beaches resulting from
sewage discharges, and land degradation resulting from overgrazing and overcropping
of marginal lands, are all examples of poorly defined or allocated user
rights.
Origins of Tradeable Pollution
Rights
Emissions trading in the US arose from government
and business concern that economic growth would be constrained by air quality
laws enacted as part of the Clean Air Act. Under these laws, maximum allowable
concentrations for specific air pollutants were set for each region. The problem
for regions which were already over the maximum allowable concentrations (non-attainment
areas) was how to achieve economic growth when industrial growth was likely
to add to the pollution load and therefore would be illegal.
In response, regulators adopted an ‘offset
policy’. Initially, these offsets occurred within companies. Firms that
wanted to expand had to reduce the emissions from their existing facilities
so that the total amount of emissions when they built their new plant was no
more than they had previously been discharging.
This then spread to external offsets. For example,
in Oklahoma City, oil companies were persuaded by the local chamber of commerce
to reduce their hydrocarbon emissions enough to allow a new General Motors car
manufacturing factory to be established in the area. Elsewhere government facilities
reduced their emissions to offset the effect of new private industries moving
into their areas. In another situation, an oil company planning to build a petroleum
processing plant that would discharge sulphur dioxide and hydrocarbons arranged
to pay for the pollution control equipment for a dry cleaning business; to buy
and close down a chemical factory; and to buy low-sulphur fuel for some ships
in San Francisco Bay (Senneca and Taussig 1984: 233).
Such arrangements were formalised into a market
for offsets–in fact, offsets became mandatory for major new sources of
pollution in non-attainment areas. Trading in pollution quotas means that firms
already in an overpolluted area can voluntarily reduce their emissions; in return
they get ‘emission reduction credits’. These credits can then be sold
to firms wanting to move into the area. New firms have to buy 1.2 emission reduction
credits for each unit of emission that will come from their plant. However,
most offsets still occur within companies rather than between companies.
It was soon realised by the US authorities
that offset policies were not enough to reduce pollution to acceptable standards;
additional ‘bubble policies’ were introduced to deal with established
industries. Such policies also started off by being applied to individual companies.
An imaginary bubble with a single opening is placed over an industrial complex
which actually has more than one point of discharge. This means that the stacks
are not regulated individually, but standards are set for the total emissions
of the whole complex. In this way, the company can meet the standards by reducing
the emissions from those of its operations where it can be done cheaply and
leaving other operations with above-standard emissions. The concentrations and
volumes of emissions from the various operations are then averaged, and it is
this average that must meet the standard. The regulator does not have to negotiate
what pollution control equipment should be installed at each outlet point. This
is left up to each company to decide.
The bubble concept seldom involves trading
outside a company. However, the concept can be extended from one industrial
company to a whole region and several firms. Standards are set, and firms are
encouraged to reduce their pollution beyond the required standards to create
emission reduction credits. Such credits can be stored for use later (in an
emissions bank) when a firm may want to expand, or may be sold to another company
that cannot meet the standard. Companies that cannot afford to meet the standards
can buy emission credits from other companies and continue to exceed the standards.
Although bubbles have saved industries a lot
of money, there is little evidence that they have benefited the environment
in the same way. A 1989 study published by Hahn and Hester (1989), themselves
advocates of tradeable pollution rights, found that the effect of bubbles on
environmental quality was unclear:
although we recognize that a few bubbles
have enabled firms to avoid making emission reductions that they otherwise
would have been required to make, there is no evidence to indicate what
precise effects bubbles have had on air quality. We conclude that the net
impact of bubbles on environmental quality has not been significant. (Hahn
and Hester 1989: 129)
In another application of the idea of tradeable
emission rights, the US Government has allowed the four major US CFC manufacturers
to decide how they will meet the 15 per cent reduction in CFCs that the government
is aiming for. They are able to buy and sell CFC production rights (Thompson
1990: 51).
Setting Baselines and
Caps
One of the problems with emissions trading
is setting the level of emissions that individual firms have a right to emit
so that 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.
There are various ways that baselines can be
set. In the past the baseline level was usually set in the USA by making it
the same as existing license limits. Opponents of emissions trading point out
that these established license 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.
In practice pollution credit trading did not
prevent pollution growth resulting from economic growth. Baselines were set
and companies could gain credits from keeping their emissions below the baselines
and sell them to companies who had emissions above the baseline but since new
firms were given the same baselines as established firms, the total pollution
continued to climb.
As a result of some of these problems a new
form of trading was introduced– allowance trading. With allowance trading
a prespecified number of allowances is allocated or auctioned off to polluters.
The total allocation can be based on the estimated capacity of the environment
to take a certain amount of pollution. New firms have to buy up allowances in
order to operate at all, if they have emissions of the particular pollutant
in question. This system is also referred to as "cap and trade".
In the first instance of allowance trading
the US EPA, in March 1993, allocated allowances to emit sulphur dioxide, which
is a primary cause of acid rain. A small percentage of the allowances (2.24%)
were also auctioned off. $US21 million was raised by selling 150,000 ‘allowances’
mainly to electricity companies. Each allowance allowed the company which paid
for it to release 1 tonne of sulphur dioxide into the air after 1995. The price
for each allowance was between $122 and $450, much cheaper than paying for flue
gas scrubbers to remove sulphur dioxide from their emissions (Kiernan 1993:
10; Tietenberg 1997).
A similar alternative is to set baselines according
to a reduction target. Authorities can work out what reduction in pollution
they desire and make that the basis for deciding the allocation of permits.
Those that have spare capacity on their permits or need to discharge more than
they are permitted to can trade. Most recently three states in the USA have
proposed such a system to clean up volatile organic compounds (VOC) in the air
of non-attainment areas. The EPA has already approved one of these schemes in
Chicago where it is hoped that VOC emissions can be capped at 12% less than
1996 levels. Companies that reduce their VOC emissions by more than 12% will
receive credits that they can trade with companies that are unable to meet the
12% target (Hansen 2000).
The problem with such schemes is that if the
baseline level is later 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, 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 & Hester, "reductions that were once surplus would
then be required, thereby effectively confiscating the property right held by
the firm" (Hahn and Hester, 1989). This also adds to the uncertainty of
firms that may not be inclined to get involved for fear of having their banked
credits devalued.
One way of dealing with this problem is to
allocate shares rather than credits or permits. Based on their share of the
total pollution allowed, the emitter would get a permit to emit a certain volume
of pollution per time period. The permits could be bought and sold. The share
would be owned forever but the volume of pollution it permitted could vary if,
for example, it was found that the pollution needed to be more strictly controlled
or, in the case of greenhouse gases, because of new international agreements.
There are various ways of allotting shares
or permits as we have seen. The two main ways are usually referred to as grandfathering
and auctioning. Grandfathering involves allocating shares or permits to firms
on the basis of their past emissions. Firms that polluted more in the past would
have larger shares. If the share or permit they are allocated is less than their
normal emissions, or if they increase their emissions, then such firms would
have to buy extra permits. Similarly they would be able to sell those they don’t
need if they reduce their emissions.
There are problems associated with each method.
Auctioning means that each firm has to bear additional costs just to operate
as they have to buy permits at auction to emit gases they had previously been
emitting for nothing. This is especially hard for firms that are competing with
overseas firms not having to bear these costs. It is for these reasons that
auctioning appears to be less "politically acceptable", that is less
acceptable to industry, than grandfathering. (AGO 1999)
Grandfathering, because it involves a free
allocation to begin with, does not involve these costs. However, if the initial
allocation is based on current emissions, firms may not have enough incentive
to make the reductions necessary to meet targets. Also, grandfathering favours
existing firms and disadvantages new firms wanting to set up. In order to establish
itself, a new firm must buy up enough pollution rights to cover its emissions,
or the government must increase the amount of rights available and give the
new firm an allocation. Existing firms may be unwilling to make room for the
new company and, if the government increases the rights available, pollution
levels will increase.
Ironically, it is often easier and cheaper
to install clean technology processes when a firm is newly established than
to refit an older established firm with outdated and polluting equipment. Yet
it is these new firms that could be squeezed out non-attainment areas if older
firms are unwilling to compete with them. As the Australian Greenhouse Office
points out, newcomers will be disadvantaged "thereby impeding domestic
competition and innovation" which might otherwise lead to reductions (AGO
1999).
One suggestion is that shares could be allocated
to new firms based on a mean figure for that industry, less a discount to account
for the fact that new industries tend to have less emissions. The overall allocation
could be reduced progressively over time (Young 1999).
Practical Problems
The evidence of how well tradeable pollution
rights have worked in practice is mixed. Whilst proponents claim that a given
environmental standard has been met for much less cost, opponents argue that
the environment has benefitted little from such schemes. For example in Los
Angeles there are two schemes to improve air quality. One is the Regional Clean
Air Incentives Market, RECLAIM, which enables the trading of smog causing nitrogen
oxides and sulphur oxides. An internal audit by the South Coast Air Quality
Management District found no significant emissions reductions between 1993 and
1997 when the audit was done. James Jenal from Citizens for a Better Environment
claims this happened because companies were able to inflate the baseline of
allowable emissions, enabling an additonal 40,000 tons of air pollution which
would not have been allowed under the previous regulatory regime (TRAC 1998).
The second scheme introduced in Los Angeles,
was a trading scheme enabling companies to offset their emissions by scrapping
cars, that is, removing older more polluting cars from the roads. Some twenty
thousand cars were scrapped in this way, but critics argue that these cars were
often barely running and would not have continued to be used much longer anyway
(TRAC 1998).
The introduction of emissions trading as a
mechanism for achieving the Kyoto Protocol has the potential to enable similar
"phony" reductions. The most obvious is the trading of emissions credits
with Russia and other eastern European countries that are in economic decline.
Russia’s economic decline has meant that its carbon dioxide emissions have
decreased by some 30% below 1990 levels. Now countries such as the US and Japan
are looking to buy the right to those emissions which Russia is unable to use
so that they don’t have to reduce their own emissions. This will not benefit
the environment or help to reduce the global emissions of greenhouse gases in
the long-term. They are referred to as "hot air" or or "phantom"
emissions reductions (Gupte 1998; Belliveau 1998).
The problem of inflated base-lines is also
an issue for emissions trading in greenhouse gases. If a trading scheme is based
on an initial free allowance based on past emissions, it is in the interests
of polluting companies to put out as much greenhouse gases as possible in the
next few years prior to such a trading scheme being introduced.
What is more, such a scheme rewards the worst
polluters by giving them the highest entitlements to start with. This applies
both to individual companies and to nations as well. Anil Agarwal and Sunita
Narain, claimed in the publication Down to Earth that Australia was being
rewarded for its poor record on deforestation. They argued that a significant
proportion of the country’s emissions have been from deforestation. "Emissions
which are still present in the atmosphere and are causing global warming. But
instead of being penalised for creating the problem in the first place, Australia
has been able to use its high emissions to its advantage by winning the right
to count any improvement from this position as its national credit."(Agarwal
& Narain 1998)
It is often argued by economists that markets
are more efficient than centralised government decision making because they
automatically gather information and ensure that supply and demand are balanced
and resources allocated efficiently. However, this sort of argument cannot be
applied to artificially contrived markets such as those created for pollution
rights since the need for monitoring and enforcement remains–the regulator
still needs to know what volumes and concentrations of wastes are being discharged,
and needs to ensure that the firm is paying the correct amount or deserves emission
credits, even when that firm is being charged for its wastes. "Any system
of environmental control needs inspectors to check whether claimed emissions,
discharges or resource extractions are correct: they are not less ‘bureaucratic’
because they are tax inspectors rather than regulatory ones" (Jacobs 1993:
7).
Emission reduction credit trades now frequently
involve a broker. Brokers’ fees are typically calculated as a percentage
of the value of the transaction. Add to this the costs of accomplishing
the air quality modelling that is frequently required for trades involving
noncontiguous sources of nonuniformly mixed pollutants and the transactions
costs can become very large. These costs serve to further reduce the cost
savings from trades and therefore the incentive to trade, particularly when
the potential savings are small.(Atkinson and Tietenberg 1991: 28)
Philosophical Problems
However, opposition to emissions trading is
often at a more fundamental, moral level. Greenpeace campaigner Lisa Bunin expresses
the horror some environmentalists feel towards the concept:
This approach appears like a thinly veiled
scheme to privatise air using ‘marketable permits.’ Industry simply
does not have the right, nor should it ever be given the right, to make
money off our air. Air is a part of nature that is priceless–it is
essential to all life on earth. It must never be allowed to be quantified
or traded by industry over the heads of communities, nor should industry
be allowed to bribe communities into consenting to allow them to do so.
… In my view, it is a highly offensive and dangerous program that should
be eradicated at the earliest opportunity. (Bunin 1991: 3)
Similarly, Richard Ayres, chair of the US National
Clean Air Coalition, argues that trading in emission rights "takes a public
resource and turns it into something that can be traded as if it were property".
Others dislike the inherent assumption that a certain amount of pollution is
acceptable. They question how a system of marketable permits will ensure a decreasing
amount of pollution each year, since gains made by some firms will be negated
by others buying up those gains so they can put out more pollution. The only
way that pollution will be decreased each year is if pollution rights are reduced.
However, firms are not going to take part in banking and trading their ‘credits’
if their pollution rights are reduced each year (Thompson 1991).
There is also the question of how localised
pollution will be prevented, since some firms–those that buy up the pollution
rights–will be putting above- standards emissions into the environment.
What is to stop some neighbourhoods getting more pollution while others get
less? Bunin suggests that such trading is likely to disadvantage poor communities
who will find the air quality in their neighbourhood goes down as wealthy people
negotiate and buy high air quality above their own heads.
An inherent assumption behind tradeable pollution
rights and other economic instruments is that the environment can take a certain
amount of pollution and that trading can ensure efficient allocation of that
capacity to firms that need to utilise it. In other words, they assume that
the environment has an assimilative capacity. This idea is based on the fact
that some wastes, such as organic wastes that occur naturally, will decompose
and break down in the environment if there are not too many of them in the one
place at the one time. Other materials, such as some metals, may exist naturally
in the environment at very low concentrations.
The unspoken assumption behind all such
models is that the capacity of the environment to tolerate a certain number
of renegades is something that we ought, collectively, take advantage of.
We ought to make sure that all those slots are taken, we ought allow just
as many renegades as nature itself will tolerate.(Goodin 1992: 16)
This approach is highly dependent on the ability
of scientists to assess the impact of pollutants on the environment and to determine
a safe level that will not irreversibly or severely damage the environment.
Greenpeace campaigner Lisa Bunin (1991) argues that emissions trading puts ‘blind
faith’ in both science and the regulatory authority’s ability to set
an ‘acceptable’ baseline air quality standard, as well as to monitor
and prevent deviations at each source.
Similarly Robert Fowler, a well known Australian
environmental law expert and consultant to government, argues that traditional
approaches to regulation which set ‘allowable’ discharges or emissions
have failed to reduce global pollution and are rapidly losing credibility. He
points out that plants and animals and ecosystems interact with chemicals in
such complex ways that assumptions about assimilative capacity and ‘safe
levels’ of pollution or exposure bear little relation to reality (Australian
Environment Review 1991).
The alternative approach is to adopt the precautionary
principle. Instead of purposely making economic use of what is thought to be
the assimilative capacity of the environment, a precautionary approach would
be to continually seek to reduce emissions that may harm the environment by
reducing allowable discharges to zero over time rather than selling them off
or auctioning them.
Cost Effectiveness vs
Environmental Effectiveness
Little analysis of how emissions trading affects
the environment has been undertaken. But the study done by proponents Hahn and
Hester 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 to polluters. An OECD report, which surveyed and
evaluated the experience of OECD countries using economic instruments for environmental
protection, 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)
Regulations are said to be inefficient because
they require discharges from all firms to meet uniform standards regardless
of their ability to meet them or alternatively require all firms to install
particular pollution control technologies regardless of their ability to pay
for them. Whilst this might improve environmental quality it is said to be at
a high cost. Economic instruments, on the other hand, are said to permit "the
burden of pollution control to be shared more efficiently among businesses"
(Stavins and Whitehead, 1992: 9).
The idea is that some firms can reduce their
pollution more cheaply than others and that it is more efficient to expect them
to reduce their pollution more than those firms for whom it would be expensive.
In this way the marginal costs of pollution control, that is the additional
cost of achieving an extra unit of pollution reduction, would be equalised between
the businesses. Those firms that could most afford to reduce their emissions
could sell their excess credits to those companies least able to reduce their
emissions. Proponents argue that a given level of air or water quality could
be achieved more efficiently because the firms that could afford most to reduce
their pollution levels would do so, rather than each firm reducing their pollution
by the same amount. 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 would have been required if a legislative policy was in place. Hahn and
Hester (1989: 129) found that emissions trading saved money for industry by
enabling firms to "avoid making emissions reductions that they otherwise
would have been required to make."
The conflict between economic efficiency and
environmental goals can be seen in the setting of baseline levels for tradeable
emissions. 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 (Atkinson and Tietenberg 1991: 20-26; Hahn and Hester 1989:
198, 147).
Removal of Decisions from
the Political Arena
Business people, bureaucrats and politicians
have been attracted to the idea of economic instruments by the economists’
promise that they will remove decision-making from the public arena thereby
depoliticising environmental debates. The outcomes of environmental conflicts
have been traditionally determined by the political process. Many economists
don’t like this system, however, preferring such decisions to be made by
the market. Chant et al. argue that market-based instruments transform environmental
conflicts from political problems to economic transactions:
A major advantage of the market as an allocational
device is that it provides a non-political solution to the social conflict
raised by resource scarcity. Individuals obtain title to scarce resources
through voluntary exchange and such exchange represents a solution to what
would otherwise be a political issue. (Chant et al 1990: 20)
In contrast legislative policies are characterised
by Chant (1990: 8) and his colleagues as engendering "an adversarial relationship
among regulators, environmentalists, and private industry. As a result, excessive
economic resources often have been used for litigation and other forms of conflict
among concerned parties". Jeff Bennet (1991) has also argued that the political
process of allocation of scarce environmental resources is "highly divisive,
confrontationist and largely inefficient", because resources are misallocated
and a great deal of time and money is spent on "the largely unproductive
activities of lobbying and protesting." If, instead, he argues, the market
could be used to allocate environmental resources on the basis of supply and
demand, just as other choices are made (for example, between growing wool or
wheat on a farm), they could be removed from the political arena.
Anderson and Leal (1991: 23) juxtapose the
market with the political process as a means of allocating environmental resources
and argue that the political process is inefficient, that is it doesn’t
reach the optimal level of pollution where costs are minimised:
If markets produce "too little"
clean water because dischargers do not have to pay for its use, then political
solutions are equally likely to produce "too much" clean water
because those who enjoy the benefits do not pay the cost... Just as pollution
externalities can generate too much dirty air, political externalities can
generate too much water storage, clear-cutting, wilderness, or water quality.
Free market environmentalism emphasises
the importance of market processes in determining optimal amounts of resource
use.
Gary Sturgess (1991), former director-general
of the New South Wales Cabinet office, is one of many who has been convinced
by such arguments and has argued for market-based solutions to environmental
problems as they have the potential to remove the politics from policy-making
and to prevent politics from distorting decisions.
Politicians have seen the "environmental
problem" as being one of potential politically damaging conflict. In making
policy decisions in this area they are forced to make choices that inevitably
put some sectors of the electorate off-side. Bureaucrats tend to see the "environmental
problem" as more of a technical/managerial problem that can be solved more
efficiently without political interference. Both politicians and bureaucrats
have reason to prefer a solution that is technocratic and non-political and
this is the way economists have sold economic instruments.
Reaffirming Market Principles
and Business Autonomy
The heightening awareness of global and local
environmental problems during the late 1980s in many countries around the world
drew attention to the inadequacies of existing political, economic and regulatory
structures. There were increasing demands from environmental and citizens groups
for tightened environmental standards and increased government control of private
firms and corporations. Green political groups challenged traditional political
parties in elections with varying degrees of success. It appeared as if the
free market economic system (like the socialist system) was unable to provide
economic growth and environmental protection.
Under threat, business groups and governments
looked to economic instruments as a way of avoiding stricter and more costly
regulations that might inhibit economic growth; as a way of solving a political
problem; and as a way of correcting and therefore preserving the free-market
system. In 1991 the OECD (1991) issued guidelines for applying economic instruments
and an Economic Incentives Task force was established by the US EPA "to
identify new areas in which to apply market-based approaches" (Stavins
and Whitehead 1992: 29). Similar units have been established in regulatory agencies
in other countries including Australia where the Commonwealth Department of
Environment, Sport and Territories has set up an Environmental Economics Unit
with this as one of its objectives and the NSW Environmental Protection Authority
has done the same. At the Earth Summit in Rio in 1992 business groups pushed
for the wider use of economic instruments in conjunction with self-regulation
(Schmidheiny 1992: chapter 2).
For some advocates, promotion of market-based
instruments is a way of resurrecting the role of the market in the face of environmental
failure. They claim that economic instruments provide a way that the power of
the market can be harnessed to environmental goals (Tietenberg 1990: 42; Stavins
1989). Economic instruments, such as tradeable pollution rights, serve a political
purpose in that they reinforce the role of the ‘free market’ at a
time when environmentalism most threatens it.
Chant et al (1990: 62) argue that "contrary
to the popular view that a market system leads to the abuse of the environment"
it is in fact the absence of a market which leads to environmental degradation.
They claim that where the environment consists of common property or ill-defined
property rights then there are no markets "to price and allocate valuable
environmental assets." Their underlying agenda comes through when they
point out that the use of the price mechanism, such as effluent charges or tradeable
pollution rights, not only corrects this situation but "has an important
additional advantage in that it extends the operation of the market system and
limits the growth of bureaucratic forms of government control" (1990: 66).
Similarly, Anderson and Leal (1991: 171) reveal
their concerns with government intervention in the form of legislation when
they say that "free market environmentalism emphasizes the importance of
human institutions that facilitate rather than discourage the evolution of individual
rights." They argue that even if legislation improves environmental quality
it is at the expense of "individual freedom and liberty".
In 1978 Washington-based government officials
were interviewed about their attitudes to economic instruments. Their responses
indicated that their opinions about economic instruments were based on ideological
arguments:
Proponents of charges were endorsing, in
a general ideological way, "the market," and excoriating government
and bureaucrats: opponents of charges were uneasy about or hostile to "the
market" and more convinced of the necessity for the government, bureaucrats
and all. (Kelman 1983: 302)
Economic instruments also appeal to business
people because they remove their polluting activity from the ‘criminal
sphere’ and legitimise it. Unlike a fine that is imposed for doing something
wrong, a charge or a pollution right indicates that the activity is official
and done with approval. The permission granted to go on doing that activity
on a continuing basis also reinforces the perception that the activity cannot
be wrong.
The environmental crisis of the 1980s brought
with it calls for a new environmental ethic and changes in moral values that
governed the human-nature relationship. At risk was the possibility that the
profit-motive itself could be questioned and the corporations responsible for
much pollution labelled as villains. Schultz identified this possibility early
on when he said that what was needed for social welfare was "the identification,
not of villains and heroes but of the defects in the incentive system that drive
ordinary decent citizens into doing things contrary to the common good."
(Kelman 1983: 297) Economic instruments make a virtue out of the profit motive
and the pursuit of self-interest whereas those arguing for a new environmental
ethic took the traditional approach of trying to combat self-interest through
morality. Sara Diamond claims "Some farsighted corporations are finding
that the best ‘bulwark’ against ‘anti-corporate’ environmentalism
is the creation and promotion of an alternative model called ‘free market
environmentalism’" (Diamond 1991: 54).
Conclusion
The real and potential benefits of tradeable
pollution rights are ideological and financial rather than environmental. They
were developed to reduce the costs of environmental protection to industry,
to enable continued economic growth and to keep decision-making power in the
hands of industry. They have 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).
Many environmentalists have willingly accepted
that "all the possible instruments at our disposal should be considered
on their merits in achieving our policy objectives, without either ideological
or neoclassically-inspired theoretical judgement" (Jacobs 1993: 7). In
fact the ideological and political shaping of these instruments has been hidden
behind a mask of neutrality. Stavins and Whitehead have argued that "Market-based
environmental policies that focus on the means of achieving policy goals are
largely neutral with respect to the selected goals and provide cost-effective
methods for reaching those goals." (Stavins and Whitehead 1992: 8)
The portrayal of economic instruments as neutral
tools removes them from public scrutiny and gives them into the hands of economists
and regulators. Market-based measures grant the highest decision-making power
over environmental quality to those who currently make production decisions
now. A market system gives power to those most able to pay. Corporations and
firms rather than citizens or environmentalists will have the choice about whether
to pollute (and pay the charges or buy credits to do so) or clean up. Tradeable
pollution rights mean that permission to pollute is auctioned to the highest
bidder (Goodin 1992). In this way, companies can choose whether or not to change
production processes or introduce innovations to reduce their emissions.
Economic instruments are being advocated as
a technocratic solution to environmental problems which is premised on the neoclassical
economist’s view of the problem–that environmental degradation is
caused by a failure to put a market value on the environment and a lack of properly
defined property rights. By allowing this redefinition of the environmental
problem, environmentalists and others implicitly agree that an extension of
markets is the only way to solve the problem.
If environmental degradation is indeed a result
of a failure to price environmental goods and therefore harness self-interest
to the common good then economic instruments could well provide a much needed
solution. However, if environmental degradation has resulted from always making
environmental concerns secondary to economic concerns, and having decisions
made by people who see environmental resources merely as an adjunct to production,
then economic instruments will merely perpetuate the problem and subvert any
potential for political or value-based change.
Such political and ideological choices are
not clear whilst environmentalists and others insist on viewing economic instruments,
such as tradeable pollution rights, as neutral tools.
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