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11.3.1. Air Pollution

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Economic Incentives for Pollution Control

Under the terms of Germany's 1985 Federal Immision Control Law and 1986 Technical Instructions on Air Quality Control, new sources of air pollution can be established in areas with especially poor air quality provided that pollution from nearby sources is lowered so that total emissions in the area are lower after construction of the new facility. This rule allows polluters to negotiate to determine who will reduce emissions and by how much. Under another scheme in effect until 1994, an existing facility could obtain a temporary exemption from tighter emissions abatement standards if it and nearby polluters achieved significant combined emissions reductions.

The impact of these offset provisions has been minimal. For existing facilities, trading opportunities were severely limited by a number of factors:

Out of roughly 17,000 pollution abatement initiatives in Federal Environment Office statistics for 1991 and 1992, fewer than 50 involved offsets.

According to the German Industries Association (BDI), the new source offset provisions, much like those for old sources, have involved almost exclusively intra-firm trading. The most common application appears to be the creation of a new source alongside an existing one that it will eventually replace. One recent inter-firm initiative involved several fluoride-emitting ceramics factories concentrated in the Koblenz region. The factories sought to negotiate an arrangement under which only the larger ones would install abatement equipment while the smaller ones would help them pay for it. However, this initiative failed.

Canada's acid rain and chlorofluorocarbon (CFC) reduction programs make limited use of trading rights. The Province of Ontario's electric utility is allowed to trade emissions between its power stations, and the Province allows trading between SO2 and NOx emissions. CFC producers are allowed to trade production rights between facilities and to trade between different types of CFCs. Inter-business trading is not allowed under this system. There has been little trading under these programs.

In Santiago, Chile, an air pollution commission has introduced a tradable permit scheme for industrial sources of particulate whose emissions exceed 1,000 m3/hour. As in the United States, new sources are allowed only if their emissions can be offset by reductions from existing sources. Trading also takes place between sources exceeding their emissions allowances and those emitting less than their allocated amount. Maximum daily emissions (and allowances for each source) are gradually being reduced to a target level to be attained by 1997. Margulis (1994), p. 116.

Poland experimented with tradable air pollution permits in the Chorzow area. According to an Eastern European study of incentives in environmental policy, this experiment "proved extremely successful in bringing visible improvements more rapidly and at a lower cost than attainable through traditional instruments." Lack of legal basis for tradable permits has prevented the use of such schemes elsewhere in the country. An environmental protection bill has been proposed including language that would provide a legal framework for trading schemes. RECCEE (1995), p. 102.

A 1993 revision of Taiwan's Air Pollution Control Act included provisions under which individual sources may be exempted from emission standards if they can control sufficient amounts of the same types of emissions elsewhere in the same air pollution control region. It is not clear how widely these provisions have been applied. Pan (1994), p. 85.

The U.S. Agency for International Development has worked with at least two other countries, the Czech Republic and Kazakhstan, to create air emissions trading programs. As of early 1996, the Czech program was still in a developmental stage. In late 1996, the first trade occurred in Kazakstan when one source gave a package of future rights to emit 10 pollutants to a second source in exchange for rights to emit 6 mostly different pollutants plus a modest cash payment. In both cases the rights were unused permitted amounts. With this trade, air quality is expected to decline since total emissions will increase.

Like the United States and Canada, Mexico and Singapore sought to ease the phaseout of chlorofluorocarbons (CFCs) through marketable production quotas. In Singapore, CFC use permits were allocated quarterly, half on the basis of historical use and half through sealed bids. In registering to participate in the bidding, users and importers specified the quantity of CFCs they wanted and their offer price. The lowest winning bid price served as the price for all allocations, including those based on historical use. This system gave firms a strong incentive to substitute other products for CFCs or adopt other measures to limit CFC use. O'Connor (1994), p. 132.

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