Pollution Allowance Auctions

In high school debate, twenty years ago, I ran a case for auctioning pollution permits, the application of the free market to pollution. We did pretty well because there was nothing written against it. In the last week, it's hit the headlines. Wired points out that sulfur dioxide went on the market in 1993. Paul Krugman argues that the market fails in the case of local pollutants like mercury (though his research has been questioned). And after reading WorldChanging's take on pollution permits, I have to wonder, why aren't these sold on E*TRADE? If I want to take 5 tons of pollution off the market, why should I have to go through a broker? And if I buy 5 tons, what stops Congress from releasing 10 more tons tomorrow?

Comments

Citizens

[UID1000000]

I think that the majority of people haven't picked up on this yet, even though it's been around for 10 years. This is because there are still millions of blinking VCR lights...

I agree with you, what is the purpose b/c the govt will turn around and release more. The govt is all for major industries that use pollutants, like energy sources, etc. If the public were too buy them all up they would turn around and rerelease more "blocks".

Now let's suppose that a large group, like a co-op gets together and buys everything, all of the EPA auctions. Would society collectively turn it's head and say "hey, let's find a new source of energy, or a new source of whatever". I think that would be an interesting day...

Re:Citizens

[UID1000000]

To back that up let's suppose a co-op buys all of the 250,000 allowances. The average of $272 would suddenly go up. Thus making it harder for the industry leaders to buy them. Or maybe the other way around, harder for us to buy them.

Re:Citizens

[eugene ts wong]

It's that same government attitude that compels them to build more roads. Instead of understanding that there's a limited supply of road space, labour & material, they just keep on building & spending. This attitude is consistant all across the political spectrum.

Re:Citizens

[bobsled]

Good point - but say you can't buy them all (not enough $$, the Gov releases more...) - the price goes up - who bears the cost?

Are the power companies barred from passing this cost on to us - the consumers? I doubt it - I may be wrong but I would assume anything they have to pay for WE have to pay for.

If the cost is actually passed on to us - I wonder about the "incentive" to emit less - for there to BE an incentive it would seem that the associated cost would have to stay with the COMPANIES, and not get passed on.

Anyone smarter than this rock know?

They could make a rule...

[kabocox]

This was meant for businesses not individuals. I wouldn't be surprised if 2 rules gets implemented that state: 1 Only those entities that release these chemicals may own these allowances. 2 Once the entity releases 0 amount in their pollution emission, the allowance will automatically revert back to the governmental pool.

Re:They could make a rule...

[UID1000000]

Something similar happened to another group. Please read the following comment: http://slashdot.org/comments.pl?sid=103352&cid=880 5119

This is exactly what would happen but if the individual setup a company and took a long long time implement the use of the materials then they could effectively avert the pollution.

Citizens have no power against gov't agendas

[Spamalamadingdong]

Conservationists have already tried to shield old-growth forest by buying the timber rights. IIRC, they were told by the Interior department that they could not do this; their purchase was a contract to cut, and if they refused to do so the timber would be re-sold to someone else.

It's perverted for someone (like the Reagan and Bush administrations) to claim to support markets on one hand and the work to defeat them when they don't yield the result that they've pre-ordained.

Re:Citizens have no power against gov't agendas

[UID1000000]

That's not really fair. The conservationists would then have to have the funding to move them trees. What would it come to if the conservationists just said F-it i'm going to chop down these trees so that no one else can use them.

Let's suppose they start a slow plan, like a 10 year plan to chop them down. They might be able to get away with that. Then they can stall the process by trying to find environmental sound / safe equipment. Hmm..

Re:Citizens have no power against gov't agendas

[HMA2000]

If it was a contract to cut then the conservationists had no right to tie that land up forever. If it was a purchase of the land in question then they could do whatever they want.

Presumably it was a contract to cut and that means the proper land owner was selling rights to his land but not selling the land itself. Also, one can assume that the rightful owner of that land generates income from selling those rights. Why do you want to deny that person income? If the conservationists want to protect the forest maybe they should buy all the rights instead of just some of them.

Of course this interpretation has nothing to do with liberal or conservitive thinking but that won't stop you from getting a pot shot in, will it?

Re:Citizens have no power against gov't agendas

[Spamalamadingdong]

If it was a contract to cut then the conservationists had no right to tie that land up forever.

If the land was cut, it wouldn't have trees ready for harvest for 20-40 years. That's hardly "forever", and why shouldn't the conservationists be able to e.g. market the recreation rights to the forested land instead of the timber?

Presumably it was a contract to cut and that means the proper land owner was selling rights to his land but not selling the land itself.

This is National Forest. The owners are the citizens of the United States of America, not the current occupants of 536 seats in Washington.

Also, one can assume that the rightful owner of that land generates income from selling those rights. Why do you want to deny that person income?

The conservationists were willing to pay MORE to leave the trees than the timber companies were willing to pay to cut them. As a taxpayer, I think that the government's refusal to accept any outcome that didn't result in profits for some favored constituent's sawmill is odious. If the American public is willing to pay more for timber products so that old-growth can stand and we make our buildings out of composite I-beams with aspen chipboard webs and 2x2 pine caps, I think this is a great thing, it is the market in action.

Of course this interpretation has nothing to do with liberal or conservitive thinking...

Ignorance has its victims everywhere and in all political camps. Did you have no concept that this issue even existed or any of its specifics? If so, if you look in the mirror you'll see one.

Re:Citizens have no power against gov't agendas

[bluGill]

Forests are managed, if you do not management correctly they become overgrown, which is not healthy. Thus if you are not going to cut the trees, you need to find some other way to get rid of the old growth so new trees can grow.

Re:Citizens have no power against gov't agendas

[Red Rocket]

Yeah, I guess that explains why there were no forests until humans came along to manage them properly. How long have forests been on Earth? How long has man been here? Do you really think the forests need our brilliant management? I think that if the trees were able to vote on it, man would be de-chainsawed until we learned to be a little more respectful.

Re:Citizens have no power against gov't agendas

[Quixotic137]

They either need our brilliant management or they need to be left alone completely. The fact is that unlogged forest today is much denser than unlogged forest of 100 years ago. For one particular example, look here. These people retraced Custer's path through the Black Hills of South Dakota in 1874 precisely, and took pictures from the exact same locations as Custer's photographer. Unfortunately it's a little difficult to see from the sample pictures they have on the website, but if you can find an actual copy of the book (or care to order one), the difference in density is quite evident.

The point of all of this is that unmanaged forest creates an extreme fire hazard, as evidenced in the United States over the past few summers. When we put out the fires, the forest just keeps getting denser. We either need to let it burn (and deal with the loss of life and property damage), or manage it. Eventually it's not going to be possible to stop the fires.

Re:Citizens have no power against gov't agendas

[bluGill]

The "Indians" used to manage the forests by burning. Today forest fires are taboo, so we have to manage them other ways. Of course before that lightening set fires once in a while to clear the forests.

Mind as the other poster pointed out, there are many different forests, and all need different management. I'd tend to trust forest managers who have at least studied biology more than activists who general have not. Though the above is clearly not that case in all situations. Trees are a renewable resource, and properly managed cutting is not a problem.

Re:Citizens have no power against gov't agendas

[Red Rocket]

This is a case of our knowledge outstripping our wisdom. We have the knowledge and technology to affect the forest in profound ways but not the wisdom to restrain ourselves from doing profound damage in the name of greed and profit.

Forest managers are trained to manage a forest so that the maximum board-feet of lumber can be extracted from it, not so that maximum forest health is achieved (although, the forest must maintain some degree of health to reach maximum output.) The "activists", as you call them, are generally private citizens who are more interested in the health of the forest than its commercial value. If the forest is on private land then the owner should be free to manage the forest as he sees fit (provided he doesn't damage streams which belong to the people from bank to bank, or destroy unique and irreplaceable habitat that threatens extinction to a particular species - right to exist trumps property rights.) If the forest is on the people's property (State and National forests) then private citizens should have ultimate say over how that resource is utilized. Commercial interests must take a back seat to the people's interest on the people's land.

Re:Citizens have no power against gov't agendas

[Red Rocket]

The fact is that unlogged forest today is much denser than unlogged forest of 100 years ago.

Hmmm...You think that has anything to do with us decimating the bison herds and other grazing animals that used to keep the grasslands open? I think the real lesson isn't that we need to manage nature but that we need to exist within it and let nature lead us rather than vise versa.

When we put out the fires, the forest just keeps getting denser.

We attack and put out forest fires because logging corporations hate to see their potential profits go up in flames. Now that the automobile has allowed people to build their houses in remote locations we also put out fires to protect private property. Also, fires are more common now due to loonies who like to see things burn or don't know how to contain camp fires. Mankind's actions are the forests' problem, not their solution.

Re:Citizens have no power against gov't agendas

[bluGill]

I disagree that private citizen are interested in the health of the forest. Some are, but a large number have been swayed by activists into supporting a position that isn't for the health of the forest. In many cases the result of what these "private citizens" want is more harmful to industry than helpful to the forest.

There are however many different forests, and each is different so it is unfair to everyone to talk about general cases and assume they apply to all. Just beware of the above when looking at the issues.

BTW, Loggers are private citizens too. As are the people who buy the products built with lumber cut from forests. Both have an equal share of rights to these trees.

Re:Citizens have no power against gov't agendas

[alan_dershowitz]

I think the real lesson isn't that we need to manage nature but that we need to exist within it and let nature lead us rather than vise versa.

Simply put, people find it unacceptable when a forest fire goes out of control and burns thousands of houses, or when a cougar kills their daughter playing in the backyard. People aren't going away, and there are fundamental conflicts of interest that prevent man and nature from living together in perfect harmony. Perfect harmony in nature is the kind of life that the Calvinists called "short, brutish and cruel", and people will not stand for it.

You are absolutely, totally, 100% correct that Mankind's actions are the source of the forest's problems, but the best ATTAINABLE good is forest management.

By the way, fires are LESS common now, which is why these forests get so dense to begin with. The fault lies with both pseudo-environmentalists who oppose controlled burning for some reason, and logging companies, whose proposals for "forest thinning" certainly prevents fires as advertized, but sentences forests to a slow, unnatural death.

Re:Citizens have no power against gov't agendas

[Spamalamadingdong]

I disagree that private citizen are interested in the health of the forest. Some are, but a large number have been swayed by activists into supporting a position that isn't for the health of the forest.

And a large number have been swayed by propaganda into supporting a position which is only good for the industry, and only the industry's short-term interests at that. This says nothing about the merits of the strongest cases on either side.

Loggers are private citizens too. As are the people who buy the products built with lumber cut from forests. Both have an equal share of rights to these trees.

If they can't or won't out-bid the people who wish the trees to remain uncut, they obviously don't care enough.

Besides, if the price of old-growth timber goes up enough, it creates a business opportunity for the guy who processes scrub timber into laminated beams and other things made from small trees; small trees can be grown on a much shorter cycle, requiring less land to be disturbed. It might shift some of the demand from pine 2x4's to steel for inside walls, from oak and maple to bamboo for flooring. The need will be satisfied regardless, and we'll still have those trees that, were they cut, we could not see the likes of again for three generations.

Re:Citizens have no power against gov't agendas

[Red Rocket]

I disagree that private citizen are interested in the health of the forest. Some are, but a large number have been swayed by activists into supporting a position that isn't for the health of the forest.

Oh, I see. It's the activists who are swaying public opinion while corporations are just being good straight-arrows with no power brokering or influence purchasing at all. Those activists sure are a well-heeled bunch if they can out-PR corporations.

Frankly, it baffles my mind that anyone could see things that way. Just read this and see if you still have the same opinion.

Re:Citizens have no power against gov't agendas

[bluGill]

I started to read that link, but I got sick over all the biased propaganda there.

Yes, industry does have a lot of propaganda power. So do activists. To trust either with your information is a mistake. Activists have positioned themselves as the little guy that the "Big evil corporation" is out to get, it gets a lot of sympathy, but it doesn't make their positions more valid.

Re:Citizens have no power against gov't agendas

[Red Rocket]

I started to read that link, but I got sick over all the biased propaganda there.

There are none so blind as those who will not see.

If it doesn't fit your world view you immediately avert your eyes. I've seen plenty of biased propaganda on both sides of the environmental debate. I saw very little in that article or else I wouldn't have used it as evidence to support my point. In fact, it's very well researched and documented with footnotes.
You seem to be suffering from hardening of the ideologies. It's a disease that's fatal to a person's ability to understand contentious issues and leaves you vulnerable to propagandists on your chosen side.

Well, yeah

[Otter]

It is rather telling, isn't it, that WorldChanging finds the notion of putting one's money where one's mouth is to be such a radical notion? I'm reminded of wondering during all the fuss about anti-HIV pharamaceutical pricing why all these noble, selfless people never thought of reaching into their own pockets to save those lives that are so much more important than money. You'd almost think that their generosity was entirely limited to being free with other peoples' money.

Pass it on down

[gaj]

You are correct that companies will attempt to pass the cost on to their customer.

The limiting factor is the point at which the price increase causes sufficient reduction in demand to make overall revenue decrease. At that point, since the price has been raised as far as it can, other things have to change to increase revenuew -- either sales have to increase (new markets, better marketing, etc.) or costs have to be reduced. So, eventually, the cost of polluting becomes the one that needs to be optimized away and the company will do so, either through innovation, legislation (through lobbying) or by leaving the market.

Obviously only the first and last actually cause a net reduction in pollution.

When proposed

[nelsonal]

AFAIK these are traded on the futures exchanges, check the CME, CBOT, NY mercatile before you decide they aren't tradeable. There was a story about a group of school kids who raised money for a sulfer emisssion permit, that was then kept by the school reducing emissions at their onset. The EPA says that anyone can buy NOx and SO2 permits including members of the general public, and they list several suspiciously non power company sounding names in the winners list (I'm pretty sure Bates College Environmental Economics doesn't operate a small coal fired plant).
If you offer Cantor a reasonable return on their investment, I'm sure they would sell them to you (you do the math on how much they paid. Their contact number is listed on the broker page (and they bought 25,000 units). Enron (don't worry they sold the trading business to UBS) will likely have to short them (and then buy from Morgan or Cantor).

Re:When proposed

[nelsonal]

Sorry, Morgan bought 25,000 contracts, Cantor only bought 5,000. Both bought them for the purpose of reselling them for a profit so they will be looking to deal.

Why limited permits.

[MindStalker]

I always thought that selling license to polute should be priced at the extimated cost of cleaning up the polution. That way you can sell endless amounts of it, and use the money to clean it up, or the company would be smart and clean it up before it left the premises thus saving money.

Re:Why limited permits.

[nelsonal]

The idea is that they are given (or sold, it makes no difference to the outcome just the relative incomes of the industry) to all the potential pollutors in the industry. Lets say there are 3 power plants in a vally and each emits 1 kg of SO2 per Megawatt. The citizens of the town decide that they are tired of SO2 pollution, and are willing to pay extra for reduced emissions (currently they draw 1,000 MW. The easiest choice is to limit output per company to 75 kg. This works well, but does not provide any incentive to further reduce emissions.
The efficiencies of the market appear when one company can spend $100 extra on coal to reduce their production of SO2 to 50 kg/MW they cut theirs to well below the minimum and sell their rights to emit to a producer that might have more difficultly using the new coal, or could not affort the widget. You take advantage of the differences in cost of cleaning the pollution (letting the innovative companies clean up more and profit from it) while less innovative companies clean up less, rather than force efficient producers to pay the average cost of clean up. The permits take the decisionmaking (beyond an acceptible level of total emmissions) out of the hands of governments and let producers who are able to clean more effectivly clean more emisssions and producers less able to clean clean less. It works very well on highly mobile pollutants where 1 kg removed in one location affects most other locations.
If you sold a license to pollute at the cost of clean up, you have to know in advance the cost of clean up, missing in either direction is bad. This way you say we want this much and no more and the comapnies decide who should clean and who should pay for the right to pollute.

Re:Why limited permits.

[sfjoe]

I always thought that selling license to polute should be priced at the extimated cost of cleaning up the polution.

Cleaning up the pollution is only part of the cost. The rest of the cost of pollution (increased asthma and other lung ailments as well as quality-of-life costs) are borne by us

money after mouth

[SolemnDragon]

Didn't pay for it? Maybe you hang around with the wrong activists. Some people were donating at the same time that they petitioned and protested. Even my doctor is doing tht; he's even planning to retire over in Africa to help with time and energy. There are a LOT of programs right here in Boston working to help lower-income people in the US and all over the world get the meds they need to deal with HIV/AIDS, and i am amazed how many of those noble and selfless people
are reaching into their own wallets to do it.

My mum, for example, worked with RI project AIDS for a long time, most of my childhood, and she did that on a regular basis and taught the rest of us to do so. She also gave to other AIDS foundations, and if you really feel strongly about the idea that these lives are worth more than money, i can help put you in contact with charities who will help your donation go farther.

link

[SolemnDragon]

meant to link Here to one of those people.

goals of auctioned rights

[G4from128k]

The goal of the government in selling rights to pollute or log is more than just a matter of granting the right to do whatever the auction-winner wishes to do. The goal of the government, in part, is to encourage economic activity that creates jobs, exportable goods, and additional tax revenues. If someone buys the right to pollute, mine, or log, but does not use it, they are , at some level, not compensating the government and public for the full impact of their withholding of that resource from economic use.

The implicit social contract is that the buyer will exercise these rights for an economic gain that benefits others too. Its analogous to the platform ecosystem business model -- you have a platform that others can create products around. You sell access to the platform but let entrants extract value too. The goal of the creating platform or in auction public resources is to enlarge the economic pie for all.

One solution might be to limit the term of the right. Rather than granting in-perpetuity ownership to a pollution right or old-growth forest logging right, the term would be limited to some reasonable length of time. For instance, five years might be sufficient time to encourage peope to buy the right and make the needed invetsment to use the right. Every 5 years, that right would be reauctioned. This ensures that one group or company can't lock-in and inefficiently use these rights. If the former owner is not making money off the right they won't have money to buy the next 5 years worth. If another group has a better use, then they can take over for a better price.

Re:goals of auctioned rights

[2marcus]

Actually, I believe the permit program sells permits for 1 ton of emissions in a given year. Though you are allowed to "bank" emissions, such that if you emit less than your permits, you can roll that over into next year (to give incentives to people to start cleaning up earlier, and to reduce the pain of the transition between stage 1 and the significantly stricter stage 2 of the SO2 program. There are some nice graphs out there showing how the step function of the governmental program was nicely smoothed through the banking program. See Ellerman, et al., "Markets for Clean Air" for a good book on the subject.).

But it is not "1 ton per year for perpetuity".

On the other hand, permit _allocation_ is sometimes done that way: a coal plant will be assigned X number of permits every year, often based on "grandfathered" emissions. But we won't get into allocation issues in this post...

-Marcus

You sound like James Watt

[Spamalamadingdong]

Which forests are you talking about? Are you talking about abandoned farmland in Vermont, the high-altitude areas across California to Flagstaff and Show Low in Arizona, or old-growth rainforest in Alaska? They're different, you know.

Even if the forests need management, it's far from obvious that clearcutting is therefore good for the forest. The species evolved in an environment where each generation of trees spouted and grew in the decay or ashes of the generation before. Timbering removes most of the wood for forest products and shreds the rest so that it decays almost immediately, releasing its nutrients before growing trees can recapture them. This can cause the nutrients to be washed into streams and lost to the land.

Getting back to the topic of the article, the administration wants to auction off certain things but won't accept results beyond their narrow preconceptions; whether pollution rights or timber, nobody's allowed to buy them to preserve the forest or the air. In this way, the desire of people to use market forces to get the air cleaned up faster or preserve old-growth trees is denied by political hacks more interested in profits for their patrons, profits which might be lost if they don't get what they lobbied for at the price they expect. They want the market restricted to people who will do exactly what they would do, and nobody else. This is neither market-oriented nor democratic.

Government fleeces activists

[raider_red]

I'm afraid that all that will happen from this will be the issuance of more polution credits. If activists buy x credits, the EPA could simply create x more credits to sell to businesses who want them. I haven't delved into the law that created this system. Is there a cap on how much can be auctioned off? Are businesses really having to shell out for scarcer pollution credits, or is this a way for the government to bring in extra funds?

zerg

[Lord Omlette]

I think I trust Krugman just a tad bit more than some free market zealot, thanks.

It's economic incentive

[Anonymous Coward]

Upfront - I work in the electrical power industry.

I always thought that that it was a relatively good idea. A company can see "good business sense" in developing and paying for pollution reduction and selling the SO2 allowances they no longer need hopefully at a profit. That is economic incentive to pollute less.
Also there are groups out there that buy the allowances away from companies to never be traded again I believe the Sierra Club is usual buyer.

Anyway piss and moan about breathing toxins all you want - unless your house or whereever you are working from is using solar power you are contributing as much as I am. Sorry - just a fact.