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Journal of Policy History 14.3 (2002) 293-320

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The Origins and Practice of Emissions Trading

Hugh S. Gorman and Barry D. Solomon


An important development in the field of environmental policy has been the growing acceptance and use of emissions trading as a cost-effective means to meet and maintain environmental quality standards. In the first half of the twentieth century, emissions trading programs not only would have been seen as unnecessary; they would have been inconceivable. The legal, bureaucratic, and technological infrastructure necessary to support such systems simply did not exist. Furthermore, most people did not see the release of pollution-causing contaminants into the shared environment as transactions to be measured and monitored. Today, the use of emissions trading programs as a policy tool both reflects and represents the dramatic changes in pollution control policy that have since occurred.

Emissions trading—one option in a suite of economic incentive instruments that economists, regulators, and policymakers have introduced over the last quarter century—refers to the use of transferable rights, allowances, or credits in programs to control emissions. 1 This examination of how emissions trading programs evolved argues that the first emissions trading programs were an unintended consequence of the Clean Air Act of 1970. Despite some early theoretical work by economists, most precedent-setting decisions were made as regulators, firms, environmental groups, and policy analysts struggled to address practical issues of implementation associated with the Clean Air Act. Today, after almost three decades of practice and theory having refined one another, the ability of program designers and policy analysts to anticipate and address the challenges of specific trading applications has significantly improved. However, some early decisions resulted in precedents that have never received the level of deliberation and debate they warrant. [End Page 293]

To date, the major applications of pollution-related trading include: state-level and regional programs to control emissions of air pollutants in local air sheds; national programs to phase out leaded gasoline and to restrict precursors of acid rain; effluent trading in watersheds; and international programs to control chlorofluorocarbons (CFCs) (Table 1). Emissions trading also has a potential role to play in addressing concerns over global warming by limiting greenhouse gases. 2 The trading of transferable permits has also been applied to nonpollution applications such as development rights for land use, fishing quotas, airport landing slots, renewable energy development, and even the electromagnetic spectrum for telecommunications services. 3 The use of transferable water rights in states such as California serves as an important precedent for all such programs. 4

The first discussions of using tradable credits to manage the release of pollution-causing contaminants occurred in the 1960s. In the first half of the twentieth century, costs associated with damage and nuisance suits and savings generated by using material more efficiently provided firms with some economic incentive to limit their discharges of pollution-causing wastes. 5 However, by the 1960s, with a growing middle class placing more value on environmental amenities, the nation's air and water were becoming more, not less, polluted. Support for additional regulatory mechanisms increased. 6 As federal legislators debated how best to control air and water pollution, economists considered the possibility of using market systems to control emissions. Critics initially feared that such market-based schemes implied that economics, not the public's desire to breathe clean air, would determine the level of air quality in a region. With a tangible resource such as water, one can allocate only so much of that resource before natural limits—such as a river going dry—take effect. Industrial society's ability to emit pollution had no corresponding natural limits, and few people wished to let "economics" establish those limits.

In the 1970s, emissions trading systems moved from the realm of neoclassical economic theory to real-world applications. As it happened, the first uses of emissions trading were an unanticipated consequence of the Clean Air Act of 1970, which established air-quality standards based on health. In metropolitan areas that failed...


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