Market-Based Environmental Regulation

Environmental Charge/Tax Systems

Economists call environmental pollution an externality, or a social cost external to market transactions. The English economist Arthur Pigou proposed in 1912 that such market “failures” should be internalized by government taxation. Yet environmental charges and pollution taxes have had very limited application to date. One municipal system growing in popularity is to charge households or businesses for solid-waste disposal in proportion to the amount of waste generated, the so-called pay-as-you-throw or unit-pricing policy. A pollution tax was enacted under the Superfund Program created by the U.S. Comprehensive Environmental Response, Compensation & Liability Act of 1980, designed to clean up high-priority hazardous-waste dumps. This program created an excise tax on chemicals and petroleum companies, though it was rescinded in 1996. A few European countries have had experience with modest pollution taxes, including the Netherlands, France, and Denmark, and carbon or climate change taxes exist in Sweden, Finland, Norway, the Netherlands, the United Kingdom, and Quebec.

A more successful environmental charge program in the United States has been deposit refund systems, which have been enacted in 11 states for specified beverage containers and 12 states for automobile batteries. Deposit refund systems for beverage containers also exist in nine European countries, Canada, Israel, Japan, South Korea, Taiwan, India, Kiribati, Micronesia, and South Australia. Germany has a deposit refund system for car batteries, refundable deposits on beverage containers since May 2006 under the Green Dot Program, and broader “take back” packaging requirements for industry to encourage recycling (funded by a license fee levied on the producer).

Tradable Permits

Emissions trading systems were based on the ideas of the economist Ronald Coase, who won the Nobel Prize in Economics in 1991. They were, however, not operationalized until their application by the U.S. Environmental Protection Agency in the mid 1970s. The idea is to provide flexibility for pollution sources to reduce their emissions by allowing trading among firms with different abatement costs. Two basic program models exist: One approach “offsets” emissions on a case-by-case basis, and the other approach allows trading among a large number of sources, with a cap placed on total systemwide emissions of a specific type.

Several applications of emissions trading have been for air pollution control, often by 50% or more. The focus has typically been on emissions from electric power plants. Most of these programs were developed in the United States, such as the national Acid Rain Program's sulfur dioxide (SO2) allowance market, nitrogen oxide (NOx) allowance trading in the Eastern United States, volatile organic compound trading in Chicago, and the Regional Clean Air Incentives Market for NOx and SO2 in Southern California. The Acid Rain (control) Program is considered a notable success. Greenhouse gas trading between nations is encouraged by the Kyoto Protocol. The European Union (EU) Emissions Trading System was implemented for this purpose in 2005, which covers nearly half of the region's emissions. Many of these programs allow for emissions “banking,” whereby excess emission reductions made in one year can be used to meet future emission targets.

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