Improvements in abatement technology will lead to a reduction in the demand for emissions
permits and thus a reduction in their equilibrium price. But the total cost of a given amount of
pollution abatement will still be minimized.Problems with Cap-and-Trade Systems
Cap-and-trade systems pose some problems of implementation. There are
technical difficulties in measuring pollution and in designing mechanisms
to ensure that firms comply with regulations (the same problems that
exist for direct controls and emissions taxes). Furthermore, the potential
efficiency gains arising from cap-and-trade systems cannot be realized if
regulatory agencies are prone to change the rules under which trades may
take place. Such changes have been a problem in the past, but they are a
problem that can be corrected.
One problem is more political than economic, but it is certainly important
in explaining why such policies are relatively rare. Opponents of cap-and-
trade systems often argue that by providing permits, rather than simply
outlawing pollution above some amount, the government is condoning
the “crime” of polluting the environment. Direct regulatory controls,
according to this argument, have much greater normative force because
they suggest that violating the standards is simply wrong. In contrast,
emissions taxes and markets for pollution permits make violating the
standards just one more element of cost for the firm to consider as it
pursues its private goals.
Most economists find arguments of this kind unpersuasive. An absolute
ban on pollution is impossible because any production of goods and