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.