Making sure the polluter pays

Commenting on Windpower Monthly's May 1996 article on pricing pollution, the author suggests two additional market mechanisms to make sure that clean energy forms penetrate the market: tradable emission permits and tradable absorption obligations, which should be considered in discerning among market mechanisms in terms of the polluter pays principle.

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From: Geoff Henderson, Wind Torque Ltd, Christchurch, New Zealand

Your excellent article on pricing pollution (Windpower Monthly, May 1996) mentions three methods of levelling the economic playing field under the heading market mechanisms: a carbon tax; giving renewable energy environmental credits; and integrated resource planning. However, the last two do not apply the polluter pays principle, which I believe should be the litmus test of a market mechanism's effectiveness and political durability. The carbon tax also suffers from two fundamental problems: its level becomes a bureaucratic estimate, somewhat removed from the ever changing physics and economics of climate change; and its use, once in government coffers, becomes blurred relative to the "polluter pays principle." As polluters we all have a right to know where our tax dollar goes; and if it is not effectively alleviating pollution it will become dangerously unpopular.

There are two other market mechanisms which should be considered in Europe, as they are being considered in New Zealand and elsewhere: tradable emission permits (TEPs) and tradable absorption obligations (TAOs). These are closely related and allow governments to do their job of regulating (that any particular gross or net emission target is achieved), while allowing the market to ensure economic efficiency without distortions. Both would have all the advantages of the mechanisms you mentioned, without many of the disadvantages. In particular they would create incentives for use of renewables such as wind.

The TAO has the additional unique advantage in that it directly addresses the physical problem which is at the root of concerns about climate change. New Zealand's Resource Management Act contains the terminology "avoid, remedy or mitigate adverse effects" on the environment. In this terminology the TAO is about remedying (or mitigating if only partial absorption is required) so as to avoid climate change.

This terminology is helpful in discerning among market mechanisms in terms of the polluter pays principle. We must ask who is paying and what are they paying for? In the case of a carbon tax, the polluter pays a penance, but does it do any good if the bureaucrats waste the tax-take (as they are wont to do)? With an environmental credit, the taxpayer pays for goods rather than the polluter paying for "bads," but is this good economics? With integrated resource planning, the polluter does not pay; decisions are made as if he were paying, but where is the money to clean up the mess? With a TEP, the polluter pays a market rate for the right to pollute, which in theory and practice might produce the correct outcomes, but should not the duty to avoid, remedy or mitigate be more direct? With a TAO, the polluter pays what it takes to clean up his mess. This is what we need if we are to avert climate change, stimulate wind energy and make a transition away from fossil to biomass carbon fuels.

There are other forms of pollution from fossil fuels, for which the TAO would not necessarily work. But CO2 is arguably the biggest and hardest challenge and I believe the TAO is ideally suited to it. For more information, I would recommend Dr Peter Read's book, "Responding to Global Warming."

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