Pricing Pollution
The economic advantage of using emissions taxes or tradable emissions
permits as opposed to direct controls is that these policies “attach a price”
to pollution and then rely on firms’ natural inclination to maximize
profits. In the pursuit of high profits (and low costs), firms seek out the
lowest cost way to reduce their polluting activities. It is this behaviour
that explains the efficiency of market-based pollution-reduction policies.
The general principle behind pricing pollution can be applied to many
different settings. Whenever there are multiple sources of a given type of
pollution, and the different polluters have different marginal costs of
abatement, a market-based policy stands to be significantly more efficient
than a policy based on direct regulatory controls.
The logic of using “pollution pricing” as an effective and low-cost means
of reducing pollution is central to Canada’s Ecofiscal Commission, a
group of Canadian economists who issue regular reports on how pricing
can be applied to various types of pollution. The Commission also
examines how the revenues raised through these policies can be
“recycled” back into the economy, in particular by using the revenue to
finance reductions in existing taxes. See http://www.ecofiscal.ca for the
Commission’s reports.