Comment ▼ Internalizing the externalities owa farmer Sven and his buddy Olie were buying hogs in Minnesota at $40 per hundred weight, bringing them down to Iowa, and selling them for $38 per hundred weight. One day Sven said, “You know, Olie, we are just not making any money this way.” Olie chuckled, “Ya, sure, you betcha—I guess we need a bigger truck.” Now, I’m from Iowa, too, and a little naïve on all matters financial, but it seems to me that folks who clean up the environment should be paid for the environmental benefits provided. And, likewise, people who use air, water, or soil while lowering its quality should pay for the use of that resource (i.e., the polluter pays principle). Simply put, we need to internalize the externalities and somehow “get the prices right”. Garrett Hardin in his famous essay, “Tragedy of the Commons”, explained that whenever resources are essentially free in the community with nobody ultimately responsible, a tragedy ensues. If we allow grazing by cattle and sheep on public land, eventually the land will be degraded. If we allow people to use oxygen from the air and replace it with CO2 and other pollutants without paying a price, eventually the atmosphere will be despoiled. There is, after all, infinite demand for a free good. Externalities exist when effects are not included in a product’s price. When population and consumption demands reach a critical point, the beneficial use of the resource can be compromised. That is what is happening now to our atmosphere, a global commons that is the ultimate “blowdown” of our fossil fuel economy. No one wants to take responsibility for it, despite the rapid increase in greenhouse gases (0.45% per year). I won’t belabor the point about how prices can become skewed. Witness that a gallon of premier bottled water costs about $4, whereas gasoline costs about $2 per gallon in the United States. Surely, something is amiss. The price of gasoline doesn’t reflect the cost of replacing a nonrenewable resource. Gasoline prices reflect neither the costs associated with protecting supply lines to the Middle East militarily nor the pollutants emitted to the atmosphere from refineries. Finally, the price of gasoline does not reflect the costs of nitrogen oxides, particulate matter, volatile hydrocarbons emitted, or the smog, ozone, visibility loss, and asthma and other health effects created as a result of its combustion in automobiles. Sometimes, it seems that we know the price of everything but the value of nothing. Oystein Dahle, Vice President of Exxon–Norway, stated, “Socialism collapsed because it did not allow prices to reflect the economic costs. Capitalism may collapse because it does not allow prices to reflect ecological costs.” Clearly, Adam Smith’s invisible hand is not omniscient. The idea
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© 2003 American Chemical Society
of a perfect market, optimally allocating resources while ensuring the protection of the environment, does not exist. Markets are not perfect, and while we can strive to make them free, they are certainly not fair in the sense of reflecting true ecological costs. That is why I am cautiously optimistic about the prospects for carbon trading. It is already occurring. Granted, there is now a chilling effect due to the United States’ failure to ratify the Kyoto Climate Protocol, but trades are commencing nonetheless. The Chicago Climate Exchange (www.chicagoclimatex.com) is operating as a market for voluntary trading of greenhouse gas emissions credits in anticipation of a full market forming someday. Fourteen companies have enrolled and pledged to reduce their greenhouse gas emissions by 4% by the year 2006. A market in the United Kingdom has already traded about $10 million in carbon among countries of the European Union that ratified the Kyoto Climate Protocol. One can purchase the equivalent of a metric ton of CO2-carbon reductions for about $1–3. The trading value is not large and the volume is not great, but at least a nascent market has emerged. If Russia ratifies the Kyoto Protocol, which puts the treaty into full force and effect, the price of a ton of carbon removed, avoided, or sequestered will move higher. Governments must encourage this revolutionary approach; they must determine the overall goals required to protect humans and the environment, and then get out of the way and allow human creativity to discover better, cheaper, and faster ways to ameliorate pollution. A commodity has been created—it is not a good or a service per se, rather it is the removal, avoidance, or mitigation of pollution. The markets for these pollutants may eventually rival those for other commodities like corn, beans, and Sven and Olie’s pork bellies. The approach has already been modestly successful with the cap-and-trade program initiated under the Clean Air Act (CAA) Amendments of 1990, establishing a market for SO2 emissions trading. Once the cap-and-trade program was established, the cost for removing SO2 plummeted. U.S. industry has easily met its obligations under the CAA at fraction of the cost predicted. We have cleaner air, less acidic lakes, and presumably better health as a result. Now let us begin to do the same for CO2, greenhouse gases, and other pollutants.
Jerald L. Schnoor, Editor
[email protected] MAY 1, 2003 / ENVIRONMENTAL SCIENCE & TECHNOLOGY ■ 159 A
