Tuesday, July 7, 2020

Marketable Pollution Permits and Medieval Indulgences

Eugene McCarthy died in 2005, and last held public office in 1971, so I suspect he is not well-known among the under-50 crowd. But he was a grand old man of Democratic politics: a Congressman from Minnesota from 1949-59, a Senator from 1959-1971, someone who got some consideration as LBJ's vice-president in the 1964, and someone who made a credible run for the Democratic presidential nomination in 1968, followed by less credible presidential runs in 1972 and 1976. His 1968 campaign left us with the slogan "Get Clean for Gene," referring to how a number of his young adult campaign volunteers cut their hair and beards so that they would be less likely to alienate undecided voters when going door-to-door. For the tone of the times, you may prefer listening to the Peter, Paul and Mary campaign song: "Eugene McCarthy for President (If You Love Your Country).

I pass along this background to emphasize that when McCarthy wrote an essay in 1990 for The New Republic, analogizing marketable pollution permits as a tool for reducing sulfur dioxide emissions to the sale of indulgences by the Catholic Church in the Middle Ages, his views got some attention (Eugene J. McCarthy, "Pollution Absolution," The New Republic, October 29, 1990, p. 9). McCarthy wrote: 
[T]he practice of giving or selling indulgences ... operated in the Middle Ages on the principle that some persons were better than they needed to be in order to escape temporal or purgatorial punishments, whereas many others, known as sinners, fell short. Under the terms of the granting of indulgences, credits built up by the good could be transferred to those who had fallen short, or even to those who anticipated falling short. The transfer could be gratuitous, it could be in answer to prayers and petitions, or it could be for money. The anticipation of credits for forgiveness of sin, according to the record, moved William of Aquitaine to establish the monastery of Cluny with the instruction that the monks pray continuously for his salvation while be went about his work of war, pillage, rapine, and other activities. This procedure is perfectly echoed in an amendment to the Senate's version of the Clean Air bill, which would allow, for example, the aerospace industry in California to buy from a local supervisory authority pollution rights in excess of its allotted amount and then allow the authority to use the money to subsidize or pay for pollution reduction somewhere else in the region, by some other person or company.
I had McCarthy's essay in mind when I sat down to write "Are Property Rights a Solution to Pollution?" for the special  issue of PERC Reports (Summer 2020), commemorating 40 years of the PERC free-market environmentalism think tank in Bozeman, Montana. The essay may offer a useful overview for those not familiar with broad picture of economic thinking about the environment: Alfred Marshall and the idea of externalities in 1890; Marshall's student A.C. Pigou and the idea of that a Pigovian tax can offer a socially appropriate adjustment for externalities in 1920; Ronald Coase's classic 1960 essay and the idea of thinking about externalities in terms of property rights; early experiments by the Environmental Protection Agency in the 1970s with first allowing firms the flexibility to meet overall pollution-reduction goals in the way that seemed most cost-effective to the firm, and then allowing firms to trade pollution permits with each other; the use of marketable permits for reducing other pollutants like lead and  sulfur (after that 1990 legislation; and novel ways of using marketable pollution permits including efforts to reduce water pollutants and carbon emissions. 

Here, I'll just add a couple of points not especially emphasized in my essay, and instead aimed at McCarthy's view that pollution is a sin to be shamed and punished, not an undesirable output from otherwise useful production that needs to be managed. 

One point is that marketable pollution permits have been proven to work, at least in certain settings and for certain purposes. McCarthy wrote in 1990: "It should perhaps be remembered, however, that the sale of indulgences did not serve the Church well—nor, in the long run, as the record shows, did it discourage sinners." In contrast, marketable pollution permits have now worked in a variety of settings as a more cost-effective way of reducing a range of pollutants. 

The other point is that those who are have a reflexively negative reaction to marketable pollution permits may wish to reflect on the idea that a law limiting pollution is, in its own way, a property right to pollute. After all, such a law grants to firms a legal right--which can be viewed as a property right owned by the firm--to emit any amount of pollution up to the limit. However, with this legal-limit property right to pollute, a firm has no incentive to seek out innovative ways of reducing pollution below the legal limit. In contrast, a marketable pollution permit means that firms do have an incentive to seek out innovative and cost-effective ways of reducing pollution, because if they reduce beyond pollution below the legal limit, they can sell those pollution permits to other firms (or in some cases, "bank" the permits for their own future use). Thus, in choosing between a legal rule to limit pollution emissions and a marketable permit system, the central issue is not whether firms are granted a legal property right to pollute--this happens in either case. The difference is that marketable permits unleashes incentives to seek out ways of reducing pollution more quickly and cheaply.