Pollution markets can power economic growth and improve environmental quality: Michael Greenstone

Markets are often fantasized as machines for economic growth. But markets also have a big potential to tackle the imperative needs that environmental pollution poses. A renowned University of Chicago economist has made some quite compelling work through Michael Greenstone advocating for the proposition that such markets for pollution can, at the same time and on one breath, stimulate growth in the economy and improve quality in the environment. Here’s why. With the application of market mechanisms, governments and business can better control pollution as compared to the traditional regulatory approach.

Introduction to Pollution Markets

Pollution markets are commonly known as cap-and-trade systems or emissions trading schemes. These mechanisms aim to control pollution through the provision of a limit in terms of the total amount that could be emitted. Under this system, the government controls the total allowance of pollution across the given area and then assigned it to the companies, thereby issuing permits to them or could obtain the permit to release some percentage of the pollutants in the atmosphere. And since other firms need some of these excess permits, the firm can then sell some of the excess permits allocated to it when it reduces its emissions to levels below the amounts issued to it. The monetary incentive therefore leads to the discovery of less-pollutive means.

Greenstone holds the view that it would be more efficient and less expensive if pollution markets were to replace the command-and-control traditional regulations in meeting the environmental challenges. A pollution market unlike the command-and-control regulations provides for legislated specific technologies and practices, rather, allows business to determine its most efficient reduction of emissions. This freedom creates room for innovation, lowers the compliance cost, and resource allocation is done based on the forces of the market.

The Dual Benefits of Pollution Markets

Pollution markets are indeed compelling in that they bring together the possible achievement of environmental and economic objectives. Being charged a price, markets internalize external costs, which involve losses from pollution into the very pollution process; otherwise, such is borne by those who do pollution. Hence companies are inspired to reduce emission loads and to seek cleaner technologies in order to maximize their return in a sustainable basis. It does so with spectacular environmental benefits.

On the other hand, pollution markets are likely to promote economic growth since they encourage business innovation and new business opportunities. Business firms that are able to identify cheap ways of reducing the amount of pollutants in the environment have an edge in the marketplace. In addition, new markets like trading in permits for pollution create new economic activities and revenues.

Real-World Application Evidence

Examples that can be given for improvement in environmental quality and the economic growth are through some real-life examples of pollution markets. Probably the most important example is the U.S. Acid Rain Program initiated under Clean Air Act Amendments of 1990, which has a cap-and-trade system to reduce the emission of SO2, which is one of the primary precursors causing acid rain. It was able to reduce SO2 emissions by more than 50% at a fraction of the expected cost: an excellent environmental program with little cost to economic growth.

An example is also of the European Union Emissions Trading System. The biggest carbon market of the world has served its purpose for reducing greenhouse emissions across the regions of the European Union. This has helped set a maximum limit on the number of emissions that can be traded by the ETS of EU and thus set up a cost-effective means to achieve climate targets while fostering innovation of renewable sources of energy and low-carbon technologies.

These are some of the examples Greenstone often cites when proving that pollution markets can indeed work in reality. He clearly points out that well-designed markets result in reduced emissions and increased economic efficiency because firms can select solutions that best cut costs.

Challenges and Considerations

Yet even with such virtues, the pitfalls of pollution markets are quite in evidence. They would, after all, subject to a reasonable emissions cap issuing permits and the mechanism of stopping the exploitation of markets, in all observable upon Greenstone realization in challenges, considering it would achieve if there happened to be intelligent design and there was firm control held over them.

Probably among the most crucial issues has been monitoring and regulation in such a way as to ensure compliance. Without some source of verifiable data about emissions, there is no sure-fired way of knowing whether the firms are being dutiful or not. Greenstone emphasizes investment in technologies and systems that would record real-time transparency and accountability over emissions.

Another is that of equity concerns. Pollution markets can generate extremely disparate outcomes to poor communities and more vulnerable groups of populations, especially where large emitters are concentrated within such communities. Considerations of equity should be factored into designing such pollution markets, and maybe even revenues generated by auctions of permits used to finance programs directed toward disadvantaged communities.

Policy and Leadership

The most cardinal success for successful pollution markets is robust policy framework and leadership, Greenstone remarks. First, caps on emissions, scientifically and economically calculated, have to be determined so that pollution markets can set ambitious but reachable targets. Also needed is to generate revenue from permits auctions in auctioning the issuance of clean energy, climate programs, and programs for the societal sector.

International cooperation is another aspect. Most of the environmental problems are global, for example, climate change. According to Greenstone, the pollution markets would be better off if there is more coordination across borders. For example, regional markets can be linked together since their number and costs that people incur decrease by increasing their effectiveness.

Michael Greenstone’s work throws light on how the power of pollution markets works to solve such environmental problems that push economic development. Pollution markets are an attractive, practical tool to solve the world’s hardest problems by adjusting economic incentives toward environmental objectives. There is much more to be done, but the research and advocacy of Greenstone will guide policymakers, businesses, and communities on how to harness the power of markets for a sustainable and prosperous future.