A key way to reduce pollution is to provide a mechanism that allows some firms to pollute as much—or even more—than they normally would. That idea may sound ridiculous—reduce pollution by allowing pollution?—but it’s been proven to be a surprisingly effective means of cleaning up the environment.
In 1990 amendments to the Clean Air Act were added which included market-based incentives to reduce pollution, such as “emissions permits” for certain pollutants. As Robert W. Crandall explains,
These are, in effect, rights to pollute that can be traded among polluters. Imagine a giant bubble that encloses all existing sources of air pollution. Within that bubble, some emitters may pollute more than the control level as long as other polluters compensate by polluting less. The government or some other state or regional authority decides on the desired level of pollution and the initial distribution of pollution rights within an industry or for a geographic region—the “bubble” that encloses these sources. Purchases and sales of permits within the “bubble” should reduce the total level of pollution to the allowable limit at the lowest total cost.
The method not only works, it has shown to reduce pollution to even levels lower than could have been achieved by an across-the-board cap on all polluting firms—and at costs that are significantly cheaper.
MRUniversity recently released a video that explains the economics of these tradable pollution permits.