Is emissions trading an economic incentive program?: Replacing the command and control/economic incentive dichotomy

Washington and Lee Law Review, Spring 1998 by Driesen, David M

David M. Driesen

I. Introduction Is an emissions trading program' an economic incentive program? Emissions trading programs allow polluters to avoid pollution reductions at a regulated pollution source, if they provide an equivalent reduction elsewhere.2 Most scholars, government officials, and practitioners equate emissions trading with economic incentives, but they do not define "economic incentives."

This failure to define economic incentives leaves unsupported the suggestion that emissions trading realizes environmental goals through economic incentives, but that traditional regulations (rules that limit discharges of pollutants into the environment without allowing trading) do not. Both traditional regulation and emissions trading rely upon the threat of a monetary penalty to secure compliance with government commands setting emission limitations.3 Perhaps neither traditional regulation nor emissions trading should be considered economic incentive programs, because both rely upon government commands.4 Or perhaps both should be considered economic incentive programs, because monetary penalties provide a crucial economic incentive in both systems.

Rather than define economic incentives, scholars employ a conventional dichotomy that contrasts "command and control" regulations (rules that dictate precisely how a polluter must clean-up) with economic incentives.5 They claim that command and control regulations work inefficiently, discourage innovation, and fail to provide continuous incentives to reduce pollution, but that emissions trading and other economic incentive programs overcome these problems.6

The dichotomy between command and control regulations and economic incentives has had a powerful influence upon policy.7 On October 22, 1997, President Clinton outlined his plans to address global climate change, an increase in global mean surface temperatures that emissions of carbon dioxide and other "greenhouse gases" cause.8 The President's speech stressed the issue's importance by referring to some possible consequences of climate change including "disruptive weather events" (such as droughts and floods), the spread of "disease bearing insects," and receding glaciers (which might cause inundation of coastal areas).9 President Clinton did not mention a single new traditional regulatory program or propose any specific cuts in greenhouse gas emissions, such as carbon dioxide, below 1990 levels to combat this potential menace. Instead, he announced a "package of strong market incentives, tax cuts and cooperative efforts with industry."'o The President's package included emissions trading, which is the "economic incentive program" most often implemented. His proposal would allow polluters in one country to avoid greenhouse gas reductions at home in exchange for pollution reductions abroad." Not surprisingly, emissions trading became an important element of the subsequently negotiated Kyoto Protocol on climate change, in which the developed countries apparently agreed to modest cuts in greenhouse gas emissions.'2

A few days prior to Clinton's speech on climate change, the Environmental Protection Agency (EPA) released its proposal to address interstate pollution, an important impediment to delivering healthful air under the 1990 Amendments to the Clean Air Act.'3 The EPA, predictably, called for an interstate emissions trading program.'4 This Article develops a theory of economic incentives. Any program to regulate or to deregulate creates economic incentives.'5 The programs referred to as "economic incentive" programs all envision a substantial governmental role of some kind. That is why lawyers, experts in law, write about them.'6

Moreover, traditional environmental law creates free markets. Law performs a fundamental role in creating markets generally," and environmental law is no different. For example, laws requiring businesses to keep promises to customers and suppliers (contract) make commercial transactions possible.18 Laws allowing owners to forbid nonowners from using "their" property create a need for nonowners to buy or rent property from owners.'9 Traditional environmental law creates markets, just as surely as contract and property law create markets Za It establishes obligations that cause a polluter to hire people (or pay contractors) to clean-up dirty facilities.21 This creates markets in pollution control technology, techniques, and cleaner processes, just as obligations to fulfill contractual promises and refrain from appropriating private property create markets in goods consumers wish to have. Any meaningful theory of economic incentives must address several key questions. What precisely does a proposed program provide incentives to do? Who will create the incentives? A theory that focuses on these questions helps analyze claims that emissions trading offers free market-like dynamic advantages - inducement of innovation and continuous environmental improvement - central to its attractiveness. It clarifies the advantages and disadvantages of traditional regulation. It shows that much more useful things can be done with the concept of economic incentives than trade emission reduction obligations. A theory of economic incentives may help create more dynamic and effective environmental law.