Last modified: 2018-06-23
Abstract
The functioning of markets for emission rights is quite simple: First a desirable emission level is established by public authorities, and, according to this predetermined level, emission rights are issued and allocated among polluters. Second, these emission permits are made tradable, in order to achieve cost-efficiency – for trading among polluters is supposed to equalize their marginal abatement costs at the competitive equilibrium.
Obviously, such trading is very different from the bilateral bargaining between the emitter and the receptor that Coase (1960) suggests. This idea is first suggested, a few years later, by two authors independently, both working on applied studies related to air and water pollution: the American D. Crocker (1966) and the Canadian J. Dales (1968). This paper aims at focusing on the early history of this idea, studying its multiple origins and its historical context in the 1960s. No paper has ever addressed this issue.
The 1960s is a decade of growing awareness of environmental issues – especially of air and water quality. At the same time, the young environmental economics is growing as a specific field among economists – a growth that is clearly related to the simultaneous development of the theory of externality. This is in such rich and prolific context of “environmental revolution” that the idea of tradable permits market merges. It merges because of the growing necessity to find new ways to manage environmental issues at a practical level. More precisely, this paper aims to show that the permits market idea is a mean to address the twofold issue raised by environmental economists at that time: on the one hand, promoting incentives-based policies, instead of the usual command-and-control instruments favored by regulators; on the other hand, seeking for alternatives to Pareto optimal solutions – mainly to the Pigovian tax largely favored by economists, but regarded unworkable given the uncertainty on the marginal damage functions. As a second-best solution, the permits market perfectly fulfills these two goals: since it rests on predetermined standards of pollution, it gives up any claim to Pareto optimality and does not require any information on the damage functions; and since it also rests on emissions trading, it is supposed to achieve the cost savings associated with incentive-based instruments.