Marketable pollution permits : an economic incentive for managing air and water pollution

Abstract

The use of the marketable pollution permit (MPP) concept as an economic incentive for managing air and water pollution is examined. Forms of MPP systems include transferable discharge permits (TDPs), ambient permit systems (APS), emission permit systems (EPS) and the hybrid pollution-offset system (POS). The key insight is that a specialised market can be created for the trading of a new property right, the MPP, which entitles holders to discharge a specified quantity of pollution. Polluters who abate their pollution relatively cheaply would undertake more of the physical abatement effort and sell their surplus MPPs to polluters who face higher abatement costs. Aggregate pollution discharges would remain the same or be reduced by such trades. In the United States of America there is active experimentation with MPP systems. The US Environment Protection Agency has pioneered the bubble, offsets and banking regulations under its innovative Emission Trading Policy for air pollution control. The State of Wisconsin has introduced a transferable discharge permit system for controlling BOD water pollution. Both these schemes bear a close resemblance to the hybid pollution offsets scheme proposed by Krupnick, Oates and Van De Verg (1983) and highlight the emerging convergence of economic theory and practical implementation of pollution controls. The MPP is favoured as a regulatory reform for reducing the aggregate costs of pollution abatement. It is more cost-effective than existing standards-based systems on their own and is a more practical strategy than the introduction of pollution charges systems. The potential application of the MPP concept in Australia is then examined. It is concluded that a MPP scheme along the lines of the hybrid pollution-offsets system is a worthwhile model on which to base the design and implementation of a MPP scheme in certain situations in Australia. Only in regions associated with major cities having a sufficient density of pollution sources could such a competitive, specialised market for MPPs become established and viable. This MPP scheme could be embedded in the existing standards-based regulatory system. In other areas where such specialised markets would not be viable, it is nevertheless concluded that provisions akin to the bubble and offsets concepts developed by the USEPA could be introduced throughout Australia as a worthwhile adaption to existing pollution control laws. In fact progress in this direction in some jurisdictions has commenced. Show more