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...

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.

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

[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

[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.

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.

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).

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.

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