The Appropriate Bubble? A look into the boundaries of emissions trading

            In regards to economic policy, Blinder makes a persuasive argument that market-based approaches to pollution-reduction are more effective in reducing costs and emissions politicians or the rigid mandates of environmental agencies.  Blinder explains, “The main reason why direct controls cost society so much more than pollution fees, you will recall, is that there are disparities from firm to firm in pollution abatement” (152). Specifically, certain firms will find it much more costly to reduce emissions than other firms, and free-market approaches, unlike straight-jacket mandates, can use this discrepancy to help lessen the economic burdens on firms while still producing the same outcome. For example, if firm Pear-Picking can lower emissions at a meager marginal cost of $5, whereas the Shoe-Scrubbing firm must spend $500 dollars to make an equal reduction, an emissions market would efficiently allocate the pollution reduction to the Pear-Pickers. Thus, by taking advantage of different firms’ varying marginal cost of emissions reduction, a minimal burden on the market can be achieved.

While I agree thus far with Blinder’s logic, I would like to point out an important complexity that Blinder calls the “bubble concept.” Blinder explains that the more firms (and potentially types of pollutants) that are incorporated into the emissions trading circle, the more efficient the market will become. If more firms are able to trade their emissions permits, the firm with the lowest marginal cost for emissions reduction will be compensated by the other firms to do so, resulting in a healthier environment at a limited cost to the economy. Similarly, if x amount of carbon emissions are found to have the same detrimental effect on the environment as y amount of methane gas, firms may individually, and through trading, collectively, weigh the potential burden to reducing each pollutant and make the most efficient plan in acquiring the desired decrease in pollutant production. However, how wide exactly should we open this market? To minimize reduction-costs, the answer would be, completely open. If one firm can reduce admissions at a lower cost, then by all means they should do it.  However, another consideration exists in tension with the principal of maximizing effiency. If I live in California, I may not particularly care that an environmental policy will reduce CO2 emissions in New York, or in South Africa. Consider the following example illustrated by the relative costs of carbon emissions price in Sweden and Germany. While this graph illustrates the relative carbon taxes, not the actual marginal cost of reduction, for my purposes this is not important. As illustrated by the relative slopes, Germany can reduce its emissions at a much lower cost than Sweden. In this Figure, Req = required emissions reductions. In this example, Germany has an opportunity to profit if it reduces more emissions than required and sells these permits to Sweden, who are incentivized to buy them because internal costs of reduction are higher. Thus, Sweden makes cuts costs by buying emission permits from Germany and Germany profits. Everyone wins! J

The potential problem here though is that Sweden citizens would be living in an environment where more pollution exists. It may be true that some forms  of emissions affect citizens of the world equally (Green House Gases may), but other pollutants affect local regions more severely. Smog in LA is a testament to this truth. LA citizens may rightfully be unhappy, then, if the trading “bubble” of emissions permits are expanded to include state, country, or even international markets. The fact that pollutant externalities effect local pollutions more severely pulls against the economic motive to have entirely free markets and should be closely considered and weighed against cost considerations when making policy decisions.