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Economic Incentives for Pollution Control

Emission trading systems came into use in the U.S. in the mid-1970s as a means for new sources to locate in nonattainment areas without causing air quality to worsen. From this important but modest beginning, pollution trading systems now come in a wide variety of forms, apply to a large and growing number of sources of pollution that impact air, water and land. The general principle of pollutant trading systems is that sources may satisfy their obligations by one of two means: (1) limiting their releases of pollution to no more than the permitted amount, and (2) releasing more (or less) than the permitted amount and exchanging credits representing any deficiency (or surplus) in the quantity of emissions controlled with other sources. Sources with marginal costs of pollution control that are about average are likely to meet their obligations without trading. Sources with relatively high marginal control costs are likely buyers of pollution reduction credits and sources with relatively low marginal costs of control are likely sellers of excess credits. Trading systems have evolved to include far more than the exchange of pollution reduction credits. For example, the well-known acid rain trading system is based on allowances for future emissions. Certain Colorado communities have created programs to trade the right to own and operate a wood burning stove or fireplace. For a number of years there was an active program under which refiners could trade lead for use as an additive in gasoline. Heavy-duty truck manufacturers can meet engine emission standards by averaging together the emissions performance of all engines they produce. Programs to trade water effluents are operating in selected locations. Developers whose activities would cause the loss of wetlands can satisfy mitigation requirements in some areas by purchasing credits from a wetland mitigation bank. These and other trading systems for air, water and land are described below. The discussion begins with a review of trading programs in air emissions, followed by sections on water effluent trading, land development, and finally, international trading programs in which the US is involved. A few basic parameters may be used to characterize trading systems: (1) whether trading is restricted to averaging within single facility, allowed among facilities owned by the same firm, or allowed among firms or facilities under different ownership; (2) whether there is a cap on overall emissions or effluents; (3) whether tradable certificates are obtained as allowances for future pollution or as a credit for previous pollution control actions; (4) the required trading ratio (one to one or some greater ratio); (5) whether tradable certificates can be banked or stored for future use; and (6) how credit generation and trading is monitored. The success of the trading systems described in this Section do not appear to depend upon any particular formulation; however, trading probably would not function to lower compliance costs and protect environmental quality if one or more of these parameters is not defined.

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