Emission trading – Will it work?

 A major fault of neo-classical economics is that it does not consider the externality costs of waste products. New Zealand is currently in the process of passing an emission trading bill to address this issue to encourage sustainable development. The latest amendments to the bill is described at http://www.scoop.co.nz/stories/BU0806/S00282.htm and appears to have already incented firms to shift investments into sustainable technologies.

But, will a free market solution that simply puts a price on pollution lead to sustainable development. With a strong sustainability perspective which says that MMK (man-made capital) cannot replace NK (natural capital), a free market solution may just slow the depletion of NK since firms will reduce waste based on the additional cost but not necessarily cause a switch to a sustainable practice. A sufficiently high cost on pollution would be necessary to cause shift to sustainable technologies, but such a high cost shock may endanger firm survival and result in increased end-consumer prices. To the credit of New Zealand, its bill will provide protection to firms from foreign competitors that do not have to pay emission costs, and the government will channel revenues from the program to end-users to help offset increased consumer costs.

Ultimately, the question is whether the free market solution will be effective to getting firms and people to switch to sustainable practices. Or, would other methods such as awareness campaigns or outright legislative bans on unsustainable practices be better? Or, perhaps there exists other creative methods to initiate change.

Jerry

 

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Posted in ecological tax reform, government policy
One comment on “Emission trading – Will it work?
  1. rhunter77 says:

    Good post Jerry. Emission trading is an interesting idea. In practice, I think that accounting for emissions can be really complicated. The Government of Canada used to release an annual report regarding the emissions from federal operations and there were a lot of challenges in actually tracking the amount of energy consumed from all the buildings and vehicles. There were even debates regarding the amount of emissions associated with the different types of fuel, like ethanol. I think there are definitely challenges in accounting for emissions, but it is possible. The Chicago Climate Exchange started emissions trading years ago, but it doesn’t seem to have caught on much. It will be interesting to see if it works in New Zealand.

    Rob

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