Trading Pollution: How Pollution Permits Paradoxically Reduce Emissions

Understanding Acid Rain and Tradable Permits

The Formation of Acid Rain

• When gases like sulfur dioxide and nitrogen oxide are released into the atmosphere, they react with water and other chemicals to form sulfuric and nitric acid, leading to acid rain.

• Acid rain has detrimental effects on the environment, including killing trees, plants, and fish, as well as eroding buildings and automobile paint.

Command and Control vs. Tradable Permits

• The government can reduce pollution through a command-and-control method by mandating factories to install specific technologies like scrubbers.

• However, this approach does not account for variations in costs among different plants; some may have cheaper methods for reducing pollution than others.

Harnessing Market Forces

• To effectively reduce pollution while considering cost differences, the government can issue tradable pollution permits that allow firms to buy or sell their rights to emit pollutants.

• Each permit allows the emission of one ton of pollutants; although it seems counterintuitive, limiting permits ensures total pollution reduction remains consistent with command-and-control methods.

Economic Incentives in Pollution Reduction

• Power plant owners with lower costs for reducing emissions can profit by selling unused permits instead of using them themselves.

• Conversely, those facing higher costs will seek to purchase permits since it's more economical than investing in costly pollution reduction technologies.

Achieving Cost-effective Pollution Reduction

• This market-driven approach leads to an efficient allocation where pollution is reduced more significantly at lower-cost facilities while maintaining overall reduction targets.