The Heartland Institute - Auctioning Pollution Rights - by Ted Gayer

The Heartland Institute - Auctioning Pollution Rights - by Ted Gayer:

A brief explanation of applications of market mechanisms to pollution rights:

"In the past 15 years, cap-and trade programs have become the preferred means of regulating air pollutants. A cap-and-trade program establishes the annual number of allowable emission permits (the 'cap'), which is set below the existing emissions level. Each regulated entity must cash in one permit for each unit of air pollution it emits. The cost savings come from allowing firms to trade permits, so that a firm that finds it costly to reduce its marginal unit of pollution can instead purchase a permit from another firm that can reduce a unit of pollution for less cost. Because the overall cap is binding, the result is a reduction of pollution to the target level at costs much lower than the more rigid command-andcontrol regulations"

In practice there has been a full spectrum of implementations on national levels and I think many countries are still a far cry from achieving cost efficiency in the usage and bonafide effects concerning the goals of lowering pollution numbers. But it is anyhow the first econopolitical instrument that has potential to be useful in the long run.

There might be better incentives in other economical instruments, like traditional "stock or in natura" exhanges.