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HBX Business Blog

Is There a Place for Pollution Markets in the Modern Economy?

Posted by Ben Chowdhury on January 19, 2016 at 10:00 AM


How much are you willing to pay for the right to pollute? If you drive into work like I do, maybe you would be willing to pay quite a lot. In reality, most individuals do not directly pay for the right to pollute. Instead we pay via the price of oil, coal, natural gas, and electricity.

In some cases individuals are paid to not pollute as with subsidies and tax rebates given to households that install solar panels as a form of clean energy. In light of the recent climate talks in Paris, we are taking a closer look at pollution markets and their role in today’s climate.

In many industries, the idea of paying for the right to pollute is increasingly prevalent. There is world-wide agreement on the need to limit pollution, specifically by reducing carbon emissions, but there is no such agreement on the policy or mechanism to do so.

One mechanism that has been used in the past is the creation of a pollution market, also known as cap-and-trade. In this system, companies are allotted a pollution allowance and then are allowed to trade those allowances with other companies. In this way, the market decides how much a pollution allowance is worth and distributes these allowances efficiently among all companies.

The major benefits of a pollution market are that the market creators, governments, or international organizations decide the total amount of pollution they wish to allow but do not have to figure out how to most efficiently distribute these allowances. Pollution markets have been in use since George H. W. Bush implemented them in 1990 to curtail sulfur dioxide emissions and the resulting acid rain.

More recently, there was a loud call from industry leaders for a cap-and-trade system to be discussed at the Paris climate talks. On the other hand, some argue that a cap-and-trade system is outdated and won't work in today's economy.

What do you think? You can read more at Marketplace here.

Topics: HBX CORe, HBX Insights