Pollution Economics

The New York Times
August 10, 2013


WITH more than a million people in China dying prematurely each year from breathing its dirty air, and with warming temperatures portending rising sea levels and disruptions to food production, the centrally planned Communist country is experimenting with a capitalist approach to address the problem: it is creating incentives so that the market — and not the government — will force reductions in emissions.
The United States invented this approach in the 1990s to deal with acid rain. The effort was tremendously successful in reducing sulfur dioxide emissions that were poisoning lakes and streams, contaminating soils and accelerating the decay of buildings, at a cost lower than even its advocates anticipated.
But the United States has taken a policy detour that has hurt its efforts to reduce greenhouse gases. Congress has spurned the cap-and-trade approach China is trying, even though it is widely recognized as a cheaper way to lower emissions. As a result, President Obama has had little choice but to turn to government regulation to reduce these pollutants. Consumers will pay a higher price for electricity as a consequence.
China, the world’s largest emitter of carbon dioxide, has begun its effort in the southern city of Shenzhen, paving the way for a national Chinese market in a few years. Like Europe, which voted to extend and improve its emissions market, and Australia and New Zealand, Shenzhen chose a carbon market as the most efficient way to lower its greenhouse gas emissions.
Under the Shenzhen program, the government will set limits on carbon dioxide discharges for 635 industrial companies and 197 public buildings that together account for about 40 percent of the city’s emissions. Polluters whose emissions fall below the limit can sell the difference in the form of pollution allowances to other polluters. These companies must decide whether it is cheaper to reduce emissions or pollute above their limit by buying allowances, whose price will be set by supply and demand. But the pressure will be on, because the limits will decrease over time. Six more regional pilot programs are planned over the next year.
More than 20 percent of global greenhouse gas emissions are now subject to carbon pricing systems. About 60 other states, provinces or countries are considering similar approaches, according to a recent World Bank report.
Carbon cap-and-trade programs align environmental goals with market incentives. Conventional regulatory approaches “cannot ensure achievement of emissions targets, create problematic unintended consequences, and are very costly for what they achieve,” says the economist Robert N. Stavins, director of the Harvard Environmental Economics Program.
So how did America detour away from emissions markets, which are the preferred approach of many economists, climate and consumer advocates, and many electric utility companies that own and operate power plants?
It all comes down to politics. Before the last recession, political support was building for a carbon market, with various Republicans, including Senator John McCain, his party’s 2008 presidential nominee, supporting a market-based approach. After House Democrats approved a cap-and-trade bill in 2009 that put a price on fossil-fuel emissions, the issue became a target of the Tea Party. In the midst of the worst economy in 75 years, the Senate declined to take up the measure, and cap and trade became a dirty term on Capitol Hill.
Even so, several states already have turned to this approach. California’s effort began in January. Nine mid-Atlantic and Northeast states use it under the Regional Greenhouse Gas Initiative.
In Washington, faint whispers of a carbon tax are still occasionally heard as a solution for budget and environmental problems in a single policy. But even if that were to happen, the tax would probably be small and would not guarantee the reduction in emissions needed. Like a tax, carbon markets can also generate revenue that can be rebated to consumers or used to lower other taxes.
The United States can still move back into a leadership position in the effort to reduce carbon dioxide in the atmosphere. Learning from the experiences of the European Union and other programs, America can avoid the hiccups that hampered early efforts.
As the effects of a warming climate become increasingly apparent and the costs of adaptation rise, inaction will become an untenable political position. Markets play to America’s strengths. As the first President Bush said about his policy of emissions markets for controlling acid rain, markets “harness the creativity and ingenuity of the private sector.” What could be more American than that? Just ask the Chinese.
Dirk Forrister is president and chief executive officer of the International Emissions Trading Association. Paul Bledsoeis a senior fellow in the energy and climate program at the German Marshall Fund of the United States.
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