Emissions trading approaches to pollution control involve two phases: (1) an initial allocation of control responsibility and (2) an organized market or series of trading rules which allow surplus emission or concentration reduction credits to be transferred from one source to another. Defining the baseline control responsibility, the focus of this chapter, is important not only because it has a major effect on the distribution of the financial burden associated with pollution control, but also because under the proper conditions it offers the control authority a great deal of flexibility in how it distributes that burden without jeopardizing the cost effectiveness of the program.
This distributional flexibility is a two-edged sword. On the one hand, it allows the control authority to pursue a just or fair distribution of the costs and benefits. On the other hand, the distribution of the financial burden can become a political struggle in and of itself, with a majority coalition channeling the lion's share of the benefits to itself and a disproportionate share of the costs to a reluctant minority.
This chapter defines and explains the possibilities for affecting the distribution of financial burden with a transferable permit system, and uses this framework to understand the current emissions trading program as well as to examine alternatives to it. Following a discussion of the existing estimates of the costs of the command-and-control approach, a survey of the empirical evidence is used to analyze the possible ways permit systems could be used to affect this cost burden. Finally, the emissions trading program is evaluated and further reforms are proposed.