Evan Ringquist, hotspots, and environmental justice in the New York Times

Via one of our brilliant PhD students, Noah Dormady.

Evan Ringquist is an environmental economist who does really interesting work in environmental justice. First, he took on one of the major claims in the early environmental justice research: that the EPA did not as rigorously enforce environmental violations in low-income and minority communities as in more affluent and white communities:

Ringquist, E., 1998, A question of justice: equity in environmental litigation, The Journal of Politics, 60(4), pp. 1,148-65.

Recently, the New York Times highlighted some new work from Ringquist that looks at one of the most pervasive beliefs in environmental justice: that cap and trade systems cause hotspots. Places near low-income people of color are probably older industries who will simply trade to pollute more or as much as they always have, thereby cleaning up areas far away from the communities that need it most. It’s been one of the most pervasive critiques of Southern California’s RECLAIM, and it’s one of the reasons that some environmental justice folks in California are litigating against a cap and trade instrument for energy producers in climate action in California.

I’ve always been a bit dubious of these ej claims, as at times my economist self overrides my sympathetic-to-communities self. The bottom line is that we can get more overall reduction with cap and trade, and while it’s too bad that the reductions are not even-steven, properly designed cap-and-trade system reduce emissions everywhere simultaneously. The problem is that neighbors want zero emissions or simple regulatory control–understandable enough. The uncertainty created with trades bothers people. However, there are tons of things you can do to make sure you get the local improvements you want:

a) simply disallow trades once local emissions targets are hit; or
b) severely penalize trades with polluters near ej communities; or
c) severely penalize trades with polluters in hotspots.

So functionally, if a local target says you get to trade only to level X, it’s no different than a regulation that says you get to emit to level X.

Cap and trade may change hotspots, but there are already hotspots: polluters cluster for a variety of reasons already, from zoning to industrial agglomeration. So cap and trade can intervene to lessen hotspots as much as they can reinforce spatial patterns, depending on their design.

Moreover, if you are are concerned about equity and the surrounding communities, you can give them a great deal of self-determination and endow them with the permits or credits, and then allow trades with local polluters ONLY with the surrounding communities. That injects some inefficiency–in general, these markets work best when there are enough sellers to produce opportunities for gains to trade, but not so many that information problems become an issue. But it puts communities in the drivers’ seat, and if they want to enforce the maximum, they can, based on their read of their potential risks rather than some scientists at EPA or CARB who don’t necessarily have a stake in the decisions the way the community members do.

The problem is, I think, that all of it sounds less controlled than regulation. Some big-money corporations buying the “right to pollute” is intuitively wrong, as Michael Sandel became rather famous pointing out. And markets. Lord, capitalism brought us all these polluters, now it’s going to fix it? I don’t think so! However, a regulation implicitly bestows polluters with the right to pollute up to a certain amount. There’s no real difference, unless you buy Sandel’s argument. And I don’t–I believe that outcomes matter more (for the environment) than process (a controversial position, I understand, and a conclusion I draw reluctantly).

More tangibly, it’s hard to take the idea that you might have gotten more local reductions with regulation: hey, under the trading system, we only get X reduction, and they got X+Y! (for a total of 2X + Y). If those guys over there abated to X+Y, why didn’t WE get X+Y, but only X? (The fact that X is actually the target means less now that one might have had more.)

I suspect that at least some players would prefer overall we get 2X in the name of equity than 2X+Y. Why should they get Y when we don’t? And under regulation, we are likely to to 2X-E (with E being the an error in negotiation) rather than 2X, but at least then I know we got 1/2*(2X-E) and nobody got more than us. (Not irrational if the argument is made as a reflect of entitlement or respect; why, exactly, should the other place get X+Y simply because they live next to the lower cost abater?)

The big gain you get from cap-and-trade is when you observe the market, you see who trades and you begin to see the real costs of abatement because not abating suddenly as a market cost–what you could sell your permit for. Negotiated levels under regulation often occur in a context of severe information asymmetries between government and industry. Without the market, you have to rely more than you want to on industry claims of regulatory costs, which they may a priori not know or strategically inflate. When we watch the trading, we can figure out how many permits to remove from the trades to reach the cap when we wish to lower the target, and we can figure out fast to remove those permits to get as much emissions reductions as we want–with less of the threats of plant closures and layoffs that inevitably come with regulation.

Ringquists’ new study basically shows that the SO2 trading system did not create hotspots: it had overall benefits, and it benefited low-income communities most. That’s how a well-designed trading system can and should work.

2 thoughts on “Evan Ringquist, hotspots, and environmental justice in the New York Times

  1. Thank you Lisa for this insightful piece. A couple of comments in response:

    C&T programs are often large and span the influence of a significant portion of the macroeconomy. Although I am not familiar with many of the larger paradigmatic issues in the EJ literature, it is intuitive to me that when you get the desired policy outcome (reduced emissions) at a reasonable cost and can further redistributive goals at the same time, you’ve had a good day. With regard to the Ringquist piece, there are many issues at work, including easy fuel switching alternatives, nearly-unlimited banking potential with large initial over-allocation, and an available end-of-pipe BACT- each of which contributed to across-the-board reductions.

    You mention RECLAIM as emblematic of EJ claims. But, we should not forget that many of the policy objectives we aim to attain are driven not only from the quantity side, but from the pricing side as well- particularly in C&T systems. Consider that in RECLAIM, two separate property rights are distributed- Inland and Coastal. A simple calculation from the past six months shows that Coastal permits are trading at an expected value of 150 percent above Inland permits. Part of this is demand driven, and part of it, I suspect, is also an EJ differential. The pricing side is almost telling businesses that the value of a lung in Ontario or Rialto (significant minority communities) is that much less.

    But, just as on the quantity side (which is where I think each of your three alternatives come from), pricing fixes can have unintended consequences. Consider that much of what made past C&T programs fairly cost-effective was the robustness of secondary and derivatives markets. In the energy sector in particular, production planning is subject to a long planning horizon (as I am sure it is the case in transportation). Quantity constraints, such as penalizing trades in any community, may have the unintended consequence of stifling the liquidity of those derivatives markets, the success of which is badly needed to drive down compliance costs for firms that need to plan permit acquisition out to two or three decades. Volatility in those markets could otherwise serve as a shock to the price of electricity or other forms of production, which in many cases are more injurious to EJ communities.

    This same effect has a competing force on the allocations side. Direct allocation (which does not occur in auction markets like the RGGI) can play a large role in the distributive impacts as well, as Ringquist discusses. Government can further justice aims on the quantity side via its allocation methodology, but the competing effect occurs on the pricing side. Consider the EU ETS as an example. Trotignon and Ellerman (2008, Compliance Behavior in the EU ETS, MIT Working Paper) showed that in more than 30,000 observations ( 3 years by over 10,000 installations), only 27 allocations were anywhere near their actual emissions. A blind rabbit throwing unsharpened pencils at a dartboard would have better odds of hitting a bull’s-eye.

    Quantity-side distortions (misallocation) can have positive effects on the pricing side as well. As is often the case, more secondary market trades means a more robust derivatives market, which means greater pricing discovery. I am not saying that it would be wise for a government to deliberately misallocate in EJ community favor while at the same time reaping the benefit of a healthy futures market. But, I am saying that there are unintended consequences to almost any policy action in complex markets like C&T, some of which help and some of which hurt less affluent groups.

    Now, the big question is what will come of California’s upcoming market, if it ever makes its way out of the judicial process. The ARB plan is so confusing and sends so many mixed signals to every market participant, with an odd amalgam of direct allocation and auctioning, that we are not sure whether it will have all of the benefits of both worlds, or all of the worst. We all know too well that California does not have the best track record of auctioning things to power companies. And, the EJ question is ever-looming in the back of everyone’s mind. In fifteen years, will we in California be able to make the same claims about our market that Ringquist makes regarding the Acid Rain Program?

  2. But the distortions aside, I think the major question for the EJ communities concerns the “hold harmless” of local emitters, and those can be enacted I think fairly successfully in quantity regulation within the individual trading scheme. While it’s bothersome to introduce the distortions associated with penalizing trades in particular regions, we know these problems are going to occur, and we know it will have consequences both for the total cost of the scheme and for the amount of emissions reduced. But…if local concerns about pollutant levels are going to be used as a reason to avoid trading at all, it’s hard for me to believe that you wind up with a worse allocation given a “hold harmless” WITH trades than you do without trades entirely.

    Remember our choices here: do nothing (which will have significant effects on impoverished communities; they may be arguing now that they care more about local pollutants, but they haven’t seen their future energy bills), Pigouvian taxes (which require information we don’t have), regulation (which has its own set of unintended consequences, including unemployment for impoverished groups (ask any of the truckers at the ports; being unemployed is a health issue)), both upstream and downstream), or trading (with all the attendant complications and problems we are discussing here.)

    In terms of hitting the actual targets, there’s no reason to assume that a C & T would get any close to proper targets than standard regulatory instruments do, given that both require the same imperfect monitoring systems to enforce the rights or limits. 🙂

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