There appears to be growing concern about pollution and the environment. Pollution is not a new issue. Widespread public attention began at least as early as the 1970s. But with the growth of greenhouse gases and the debate over global warming, analyzing pollutants has achieved a new prominence today.
Let me state one fact upfront. I am not an environmental scientist, so I have no expertise in evaluating the debates about the environment and pollution that are occurring in both scientific quarters and in the popular media. My approach is to say, if, for example, global warming is happening and we want to reduce it (and, again, I’ll leave it to others to make these judgments), then can economics be useful in finding an approach?
First, let me offer a little background on economic behavior and pollution to set the stage. Most, probably even all, pollution occurs not because people or businesses purposefully want to harm the environment. Instead, pollution happens as a byproduct of doing something that helps us. Drivers of cars and trucks pollute, but they do so only because the driving gets them to work, school, shopping, or vacation spots—all destinations that are beneficial and productive to our lives.
A coal-fired electric generating plant emits pollutants not because the managers and owners of the company want dirtier air, but because the pollution happens when the electricity is formed, and electricity is desirable because it powers our appliances, lets us watch TV and listen to music, and keeps us warm in the winter and cool in the summer.
It’s difficult to reduce pollution—something bad—because it happens when something good—driving or powering our home—occurs. To reduce pollution, we have to reduce the good things that cause it.
Can economics help? Short of some brilliant inventors creating pollution-free automobiles and completely clean power plants, economists don’t have a magic silver bullet that will reduce pollution without added costs. But what economists can do is recommend some procedures and processes that may make the changes less costly and give us more “reduction for our buck” in moderating pollution.
One approach is a “pollution fee.” This is a charge attached to any product that, when used, creates pollution. The amount of the fee would be an approximation to the cost of the pollution. So, for example, if every time you drove and used a gallon of gas, you created 40 cents worth of pollution, 40 cents would be added to the price of gas as a pollution fee.
There are several problems with this approach. One, it’s difficult to calculate pollution fees. Two, the fees have no assurance of reducing pollution to acceptable levels. Last, for pollution created by our vehicles, there’s the practical reality that drivers are sensitive to gasoline prices and resistant to anything that increases those prices.
Economists do have another pollution-reducing idea up their sleeve that is receiving considerable attention. It has three steps. First, a standard, or limit, for total pollution is set. In the case of air pollution, the limit would relate to carbon dioxide. Next, “pollution permits” would be sold, where the sum of the permits equals the pollution limit. Third, and perhaps most important, government would leave it to the private sector (companies, individuals) to figure out how to keep pollution within the limits allowed by the permits.
Economists see several advantages with this plan. Government stays out of micro-managing pollution behavior, leaving it to the give and take of economic markets to meet the standards. Companies and individuals who have the toughest time reducing pollution would presumably purchase more of the permits, while those who could more easily reduce pollution wouldn’t. So pollution reduction would be achieved most efficiently. Finally, the plan would stimulate tremendous innovation in ways to cost-effectively reduce pollution.
The creation of pollution is a physical process, but the motivation for pollution is economic, since pollution happens in order to give us the products and services we want. It makes sense, then, that economics must be part of the pollution solution.
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.