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In Favor of Pollution Trading

A few days after Governor Hogan released plans for a renewed nutrient pollution trading initiative in Maryland, Scott Edwards of Food and Water Watch wrote a letter to the Baltimore Sun claiming that “No one who is serious about water quality should support trading”. His evidence for this was an assertion that after 10 years of nutrient pollution trading in Pennsylvania, the only thing that had happened was that point pollution sources had been made as unaccountable as agricultural sources. It sounds as though pollution trading is pretty worthless. Is this true?

Since the start of its effort to restore the Chesapeake Bay, the Chesapeake Bay Program has sought “equitable” ways to allocate pollution abatement obligations around the watershed. Over time, equitable has come to mean that all polluters should reduce their pollution by roughly the same percentage. So, if my widget factory exported 100 pounds of pollution to the Bay and the rule was that all sources had to reduce their pollution by 40 percent, then I would have to cut my pollution export back to 60 pounds. If my neighbor’s widget factory exported 200 pounds of pollution to the Bay, he would have to reduce his pollution to 120 pounds. The question arises, is it “equitable” for my neighbor to be able to send 120 pounds of pollution to the Bay, while I only get to send 60 pounds? Even more problematic, suppose that it cost me $1,000 to reduce each pound of pollution export from my widget factory, while my neighbor could do it for $100 per pound. Although I only send half as much pollution to the Bay as he does, my abatement costs would be $40,000 while his costs would only rise to $8,000. Is this equitable?

It does not seem equitable to require someone who pollutes less to bear a higher cost to meet their pollution reduction obligations. But in the absence of precise cost information, it was never feasible for the Chesapeake Bay Program to allocate reduction obligations in an equitable manner. Therefore, they allocated reduction obligations in a simple manner. And, when they allowed the possibility that reduction obligations could be exchanged under a trading program, they opened an avenue for improving the fairness of their original, simple allocation.

Following the example of my neighbor and I as widget producers, if, instead of reducing 40 pounds of my own pollution, I offer to pay my neighbor to reduce 40 pounds of pollution for me at a price of $200 per pound, we will both be better off and it is not clear that our exchange will make any difference to the Chesapeake Bay clean up. I will meet my reduction obligation for a price of $8,000 as opposed to $40,000 and my neighbor will get a $4,000 profit (which would pay half his costs of reducing his own pollution). Between the two of us, there will still only be 180 pounds of pollution going to the Bay; the same amount that would have been exported if we each had to reduce our own pollution.

Perhaps Mr. Edwards thinks that getting the cheaper reductions is less effective with respect to the restoration that we all want for the Chesapeake Bay. Or, perhaps he thinks that no polluter, even one as well-intentioned as I, should be excused from reducing their own pollution. Or, perhaps he believes that when we allow economic incentives to motivate restoration behavior, the purity of environmental protection will be lost. I don’t know. I only know that he believes that no one who is serious about water quality in the Chesapeake Bay should support water pollution trading. I believe the opposite. I believe that anyone who is serious about water quality in the Chesapeake Bay should help to figure a way to advance the idea.

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