Trading away the Earth: Pollution Credits and the Perils of “Free Market Environmentalism”




This article originally appeared in Dollars and Sense, March/April 1996, and was reprinted in Theodore Goldfarb, ed., Taking Sides: Clashing Views on Controversial Issues, Eighth Edition, Dushkin/McGraw Hill, 1999.

The Republican takeover of Congress has unleashed an unprecedented assault on all forms of environmental regulation. From the Endangered Species Act to the Clean Water Act and the Superfund for toxic waste cleanups, laws that may need to be strengthened and expanded to meet the environmental challenges of the next century are instead being targeted for complete evisceration. While a combination of public outcry and intra-partisan politics helped forestall some of the most aggressive anti-environmental crusades during 1995, people seeking to further an environmental agenda in the current political climate have a tough road to hoe.

For some activists, this is a time to renew the grassroots focus of environmental activism, even to adopt a more aggressively anti-corporate approach that exposes the political and ideological agendas underlying the current backlash. But for many, the current impasse suggests that the movement must adapt to the dominant ideological currents of the time. Some environmentalists have thus shifted their focus toward voluntary programs, economic incentives and the mechanisms of the “free market” as means to advance the cause of environmental protection.

The current wave of “free market environmentalism” is not a new phenomenon. In the closing years of the 1980s, an odd alliance developed among corporate public relations departments, conservative think tanks such as the American Enterprise Institute, Bill Clinton’s Democratic Leadership Council (DLC), and environmental groups such as the Environmental Defense Fund. The market-oriented environmental policies promoted by this eclectic coalition have received little public attention, but have nonetheless significantly influenced the debate in various political circles. Combined with the anti-regulatory agenda of the Republican-controlled Congress, these schemes often grant corporations new ways to circumvent environmental concerns, even as the same firms pose as the new champions of the environment.

Glossy catalogs of “environmental products,” television commercials featuring environmental themes, and high profile initiatives to give corporate officials a “greener” image are the hallmarks of corporate environmentalism in the 1990s. But the new market environmentalism goes much further than these showcase efforts. It represents a wholesale effort to recast environmental protection based on a model of commercial transactions within the capitalist marketplace. “A new environmentalism has emerged,” writes economist Robert Stavins, who has been associated with both the Environmental Defense Fund and the DLC’s Progressive Policy Institute, “that embraces…market-oriented environmental protection policies.” Stavins directed a pioneering effort known as Project 88, which brought together environmentalists, academics and government officials with representatives of Chevron, Monsanto, ARCO and other major corporations. Its goal, back in 1988, was to propose new environmental initiatives to the administration of President-elect George Bush that featured market incentives as a supplement to regulation.

Project 88 took a somewhat cautious approach, but it opened the door to a much more sweeping rejection of regulation in favor of market mechanisms. Its most lasting legacy was the adoption of tradable pollution allowances as a centerpiece of the Bush administration’s 1990 amendments to the federal Clean Air Act. Bush’s proposal was advertised as a plan to reduce acid rain-causing sulfur dioxide emissions by offering credits to companies that reduce emissions in a particular location. Companies can redeem these credits against higher emissions elsewhere, or sell them at a profit to other companies that have fallen behind in their compliance with federal pollution standards. For the first time, the ability of companies to buy and sell the “right” to pollute was to be enshrined in U.S. law.

Marketable pollution rights were not a wholly new idea in 1990. The EPA has experimented with a limited program of “emissions trading” since 1974, for the benefit of corporations like DuPont, Amoco, USX (formerly US Steel) and 3M. These were mostly individually brokered deals, in which EPA would allow companies to offset pollution from new industrial facilities by reducing existing emissions elsewhere or negotiating with another company to do so. This variety of emissions trading has been used in the Los Angeles area and other cities to broker specific reductions in certain pollutants (see “Playing with Fire: L.A.’s Pollution Trading Experiment,” Dollars and Sense, May/June 1994). In 1979, Harvard law professor Stephen Breyer, now a U.S. Supreme Court justice, proposed a more ambitious system of “marketable rights to pollute” as a possible alternative to taxes and regulation in an article in the Harvard Law Review.

The Bush plan was the first to extend emissions trading to a national scope, the first to establish allowances that could be traded freely as commodities in the marketplace, and the first to be codified into law as part of a major regulatory program. Its defenders claimed that the ability to profit from pollution credits would encourage companies to invest more in new environmental technologies than before. Innovation in environmental technology, they argued, was being stifled by regulations mandating specific pollution control methods. With the added flexibility of tradable permits, companies could implement the most cost-effective pollution reductions first, while costlier controls could be postponed—through the purchase of some other company’s credits—until new technologies became available. As pollution standards are tightened over time, proponents argued, the credits would become more valuable and their owners could reap large profits while fighting pollution.

How it Works, and Doesn’t

A closer look at the scheme for nationwide emissions trading reveals a particular cleverness; for true believers in the invisible hand of the market, it may seem positively ingenious. Here is how it works: The Clean Air Act amendments were designed to halt the spread of acid rain by requiring a reduction in the total sulfur dioxide emissions from fossil fuel burning power plants, from 19 to just under 9 million tons per year by the year 2000. These facilities were targeted as the largest contributors to acid rain, and participation by other industries remains optional. To achieve this relatively modest goal for pollution reduction, utilities were granted transferable allowances to emit sulfur dioxide in proportion to their current emissions.

Any facility that continued to pollute more than its allocated amount (roughly half of its 1990 rate) would then have to buy allowances from someone who is polluting less. The 110 most polluting facilities (mostly coal burners) were given five years, while all the others would have until the year 2000. Emissions allowances were expected to begin selling for around $500 per ton of sulfur dioxide, and have a theoretical ceiling of $2000 per ton, which is the legal penalty for violating the new rules. Companies that can reduce emissions for less than their credits are worth will be able to sell them at a profit, while those that lag behind will have to keep buying credits at a steadily rising price. Thus, it is argued, market forces will assure that the most cost-effective means of reducing acid rain will be implemented first, saving the economy billions of dollars in “excess” pollution control costs.

The program also included various incentives and loopholes to entice utilities to participate. A portion of the total allowances was set aside at the beginning to facilitate the construction of new projects. The government began auctioning these off in 1993, with auctions of new allowances to continue indefinitely. Would this eventually lead to an absolute increase in available credits instead of the predicted decrease in pollution? No one knows for sure. There are also many pages of rules for extensions and substitutions. The plan eliminated requirements for backup systems on smokestack scrubbers, and then eased the rules for estimating how much pollution is emitted when monitoring systems fail. With reduced emissions now a marketable commodity, the range of possible abuses may grow considerably, as utilities will have a greater incentive than ever to manipulate reporting of their emissions to improve their position in the pollution credits market. “It’s a bit like playing Wall Street or the Chicago Commodity Exchange,” said one official of the utility industry’s research arm, the Electric Power Research Institute.

The comparison with more traditional forms of commodity trading came full circle in 1991, when the government announced that the entire system for trading and auctioning emissions allowances would be administered by none other than the Chicago Board of Trade. Long famous for its ever-frantic markets in everything from grain futures and pork bellies to foreign currencies, the Board is responsible for selling and auctioning allowances, maintaining a computer bulletin board to match buyers and sellers, and even establishing a futures market, ostensibly to protect allowance holders against price fluctuations. “While a small, but significant, step toward the ultimate creation of cash and futures market trading in emission allowances, this represents a larger step toward applying free-market techniques to address societal problems,” proclaimed Chicago Board of Trade Chairman William O’Connor in January 1992. This is precisely the concern raised by critics of the system when it was first announced.

To true believers in the magic of the free market, it seemed like the perfect plan. But once the EPA actually began auctioning pollution credits in 1993 it became clear that virtually nothing was going according to their projections. The first pollution credits sold for between $122 and $310, significantly less than the agency’s estimated minimum price, and by 1995, bids at the EPA’s annual auction of sulfur dioxide allowances averaged around $130 per ton of emissions. As the value of the credits declines, the incentive to buy credits rather than invest in pollution controls becomes increasingly attractive. Air quality can continue to decline, as companies in some parts of the country simply buy their way out of having to comply with pollution reductions.

At least one company has tried to cash in on the confusion by assembling packages of “multi-year streams of pollution rights” specifically designed to defer or supplant purchases of new pollution control technologies. “What a scrubber really is, is a decision to buy a 30-year stream of allowances,” John B. Henry of Clean Air Capital Markets told the New York Times, with impeccable capitalist logic. “If the price of allowances declines in future years,” paraphrased the Times, “the scrubber would look like a bad buy.”

Where pollution credits have been traded between companies, their effect has often run counter to the program’s stated intentions. One of the first highly publicized deals was a sale of credits by the Long Island Lighting Company to an unidentified Midwestern company, raising concerns that places suffering from the effects of acid rain were shifting “pollution rights” to the very region where most of the pollution that causes acid rain originates. One of the first companies to bid for additional credits, the Illinois Power Company, canceled construction of a $350 million scrubber system in the city of Decatur, Illinois. “Our compliance plan is based almost totally on purchase of credits,” an Illinois Power spokesperson told the Wall St. Journal.

Many companies have chosen to sidestep the controversy surrounding pollution allowances—especially in light of the debate over speculative trading in so-called “derivatives” on Wall Street—while others, most notably the North Carolina-based Duke Power, are aggressively buying allowances. At the 1995 EPA auction, Duke Power alone bought 35% of the short-term “spot allowances,” and 60% of the long-term allowances that are redeemable in the years 2001 and 2002. Forbes magazine blamed the whole problem on “regulatory uncertainty”: utilities were concerned that state regulators would not allow them to include the cost of sulfur dioxide allowances in their rate base and raise customers’ electric bills accordingly. Some utilities preferred to go ahead with pollution control projects, such as the installation of new scrubbers, that were planned before the credits became available, while others switched to low-sulfur coal and increased their use of natural gas. If the 1990 Clean Air Act amendments are to be credited for any overall improvement in air quality, it is clearly the result of these efforts and not the market in tradable allowances.

The results of emissions trading to date reveal the inherent inequalities of such a system. Seven companies, including five utilities and two brokerage firms, bought 97% of the short term “spot” allowances for sulfur dioxide emissions that were auctioned in 1995, and 92% of the longer-term allowances, which are redeemable in 2001 and 2002. This gives these companies significant leverage over the future shape of the allowances market. The remaining few percent were purchased by a wide variety of people and organizations, including some who sincerely wished to take pollution allowances out of circulation. Students at several law schools raised hundreds of dollars, and a group at the Glens Falls Middle School on Long Island raised $3,171 to purchase 21 allowances, equivalent to 21 tons of sulfur dioxide emissions over the course of a year. Unfortunately, this represented less than a tenth of one percent of the allowances auctioned off in 1995.

Some of these inequities were predicted at the outset. “With a tradable permit system, technological improvement will normally result in lower control costs and falling permit prices, rather than declining emissions levels,” wrote Robert Stavins and Brad Whitehead (a Cleveland-based management consultant with ties to the Rockefeller Foundation) in a 1992 policy paper published by the Democratic Leadership Council’s Progressive Policy Institute. Despite their belief that market-based environmental policies “lead automatically to the cost-effective allocation of the pollution control burden among firms,” they are quite willing to concede that a tradable permit system is not likely to actually reduce pollution. As the actual pollution levels still need to be set by some form of regulatory mandate, the market in tradable allowances merely gives some companies greater leverage over how pollution standards are to be implemented.

Without admitting the underlying irrationality of a futures market in pollution, Stavins and Whitehead do acknowledge (albeit in a footnote to an Appendix) that the system can quite easily be compromised by large companies’ “strategic behavior.” Control of ten percent of the market, they suggest, might be enough to allow firms to engage in “price-setting behavior,” a goal apparently sought by companies such as Duke Power. To the rest of us, it should be clear that if pollution permits are like any other commodity that can be bought, sold and traded, then the largest “players” will have substantial control over the entire “game.” Emissions trading becomes yet another way to assure that large corporate interests will remain free to threaten public health and ecological survival in their unchallenged pursuit of profit.

Trading the Future

Groups like the Environmental Defense Fund continue to throw their full support behind the trading of emissions allowances, including the establishment of a futures market in Chicago. EDF senior economist Daniel Dudek described the trading of acid rain emissions as a “scale model” for a much more ambitious plan to trade emissions of carbon dioxide and other gases responsible for global warming. This plan was unveiled shortly after the passage of the 1990 Clean Air Act amendments, and was endorsed by then-Senator Al Gore as a way to “rationalize investments” in alternatives to carbon dioxide producing activities.

International emissions trading gained further support via a U.N. Conference on Trade and Development study issued in 1992. The report was co-authored by Kidder and Peabody Executive Managing Director and Chicago Board of Trade director Richard Sandor, who told the Wall Street Journal, “Air and water are simply no longer the ‘free goods’ that economists once assumed. They must be redefined as property rights so that they can be efficiently allocated.”

Radical ecologists have long decried the inherent tendency of capitalism to turn everything into a commodity; here we have a rare instance in which the system fully reveals its intentions. There is little doubt that an international market in “pollution rights” would widen existing inequalities among nations and increase the dominance of those best able to shift their assets from country to country based on the daily fluctuations of financial markets. It is a highly speculative experiment with the potential for massively disruptive consequences. Even in the U.S., a single large investor in pollution credits would be able to control the future development of many different industries. Expanded to an international scale, the potential for unaccountable manipulation of industrial policy would easily compound the disruptions already caused by often reckless international traders in stocks, bonds and currencies.

However, as long as public regulation of industry remains under attack, tradable permits and other such schemes will continue to be promoted as market-savvy alternatives. Along with an acceptance of pollution as “a by-product of modern civilization that can be regulated and reduced, but not eliminated,” to quote another Progressive Policy Institute paper, self-proclaimed environmentalists will call for an end to “widespread antagonism toward corporations and a suspicion that anything supported by business was bad for the environment.” Market solutions are offered as the only alternative to the “inefficient,” “centralized,” “command-and-control” regulations of the past, in language closely mirroring the rhetoric of Cold War anti-communism and the fervor surrounding capitalism’s “victory.” While specific technology-based standards can be criticized as inflexible and sometimes even archaic, critics choose to forget that these were in many cases instituted by Congress as a safeguard against the widespread abuses of the Reagan era EPA. During the Reagan years, “flexible” regulations opened the door to widely criticized—and often illegal—bending of the rules for the benefit of politically favored corporations, leading to the resignation of EPA administrator Anne Gorsuch Burford and a brief jail sentence for one of her more vocal legal assistants.

The anti-regulatory fervor of the present Congress is bringing a variety of other market-oriented proposals to the fore. Some are genuinely offered to further environmental protection, while others are far more cynical attempts to replace public regulations with virtual blank checks for polluters. Some have proposed a direct charge for pollution, modeled after the comprehensive pollution taxes that have proved popular in Western Europe. Writers as diverse as Justice Stephen Breyer, American Enterprise Institute economist Robert Hahn and environmental business guru Paul Hawken have defended pollution taxes as an ideal market-oriented approach to pollution. This seems far more likely to help reduce pollution than tradable permits, especially if combined with a vigilant grass roots activism that can expose abuses and make industries accountable to the communities in which they operate. However, given the rapid dismissal of Bill Clinton’s early plan for an energy tax, it is most likely that any pollution tax proposal would be immediately dismissed by Congressional ideologues as an outrageous new government intervention into the marketplace.

Pro-development interests in Congress have floated various schemes to replace the Endangered Species Act with a system of voluntary incentives, conservation easements and other schemes through which landowners would be compensated by the government to protect critical habitat. While these proposals are being debated in Congress, the Clinton administration has quietly changed the rules for administering the Act in a manner that encourages voluntary compliance and offers some of the very same loopholes that anti-environmental advocates have sought. This, too, is being offered in the name of cooperation and “market environmentalism.”

Debates over the management of publicly-owned lands have inspired far more outlandish “free market” schemes. “Nearly all environmental problems are rooted in society’s failure to adequately define property rights for some resource,” economist Randal O’Toole has written, suggesting a need for “property rights for owls and salmon” developed to “protect them from pollution.” O’Toole, who gained the attention of environmentalists in the Pacific Northwest for his detailed studies of the inequities of the U.S. Forest Service’s long-term subsidy programs for logging on public lands, has proposed dividing the National Forest system into individual units, each governed by its users and operated on a for-profit basis, with a portion of user fees allocated for such needs as the protection of biological diversity. Environmental values, from clean water to recreation to scenic views, should simply be allocated their proper value in the marketplace, it is argued, and allowed to out-compete unsustainable resource extraction. Other market advocates have suggested far more sweeping transfers of federal lands to the states, an idea seen by many in the West as a first step toward complete privatization.

Market enthusiasts like O’Toole repeatedly overlook the fact that ecological values are far more subjective than the market value of timber and minerals removed from public lands. Efforts to quantify these values are based on various sociological methods, market analysis and psychological studies. People are asked how much they would pay to protect a resource, or how much money they would accept to live without it, and their answers are compared with the prices of everything from wilderness expeditions to vacation homes. Results vary widely depending on how questions are asked, how knowledgeable respondents are, and what assumptions are made in the analysis. Environmentalists are rightfully appalled by efforts such as a recent Resources for the Future study designed to calculate a discount rate for human lives lost to future toxic exposures. Outlandish absurdities like property rights for owls raise even greater skepticism.

The proliferation of such proposals—and their increasing credibility in Washington—suggest the need for a renewed debate over the relationship between ecological values and those of the capitalist market. For many environmental economists, the processes of the market, with a little fine tuning, can be made to serve the needs of environmental protection. Various modifications in analytical methods, measurements of wealth and productivity and means of setting prices have been proposed toward this end. For many activists, however, there is a fundamental contradiction between the finite and intricately interconnected nature of ecological processes and an economic system which not only reduces everything to isolated commodities, but seeks to manipulate those commodities to further the single, immutable goal of maximizing individual gain. An ecological economy may need to more closely mirror natural processes in their stability, diversity, long time frame, and a prevalence of cooperative, symbiotic interactions over the more extreme forms of competition and predation that thoroughly dominate today’s economy. Ultimately, communities of people need to reestablish social control over economic markets and relationships, restoring an economy which ceases to be seen as the engine of social progress, but instead, in the words of economic historian Karl Polanyi, is entirely “submerged in social relationships.”

Whatever economic model one proposes for the long-term future, it is clear that the current, predatory phase of corporate consolidation is threatening the integrity of the earth’s living ecosystems—and communities of people who depend on those ecosystems—as never before. There is little room for consideration of ecological integrity in a global economy where a few ambitious currency traders can trigger the collapse of a nation’s currency, its food supply, or a centuries-old forest ecosystem before anyone can even begin to discuss the consequences. In this kind of world, replacing our society’s meager attempts to restrain and regulate corporate excesses with market mechanisms can only further the degradation of the natural world and threaten the health and well-being of all the earth’s inhabitants.