Pollution Markets and Social Equity

Abstract

This Article considers three fairness issues relating to a cap-and-trade system: fairness to industry, fairness to communities disproportionately impacted by pollution, and fairness to low-income energy consumers. First, assuming any compensation of industry is warranted, free allowances would overcompensate firms for the cost of achieving emission reductions; industry should not receive effective ownership of the atmosphere at the public’s expense. Second, environmental justice advocates argue that cap-and-trade systems generate pollution hot spots and encourage dirtier plants to continue operating to the detriment of certain disadvantaged communities. However, cap and trade has no intrinsic tendency to produce increased emissions in disadvantaged communities. Designers of cap-and-trade systems nevertheless should be alert to possible hot spots, particularly in low-income and minority communities. If hot spots are expected or emerge during the operation of the program, responses could include creating geographic grading zones, imposing ceilings on emissions in addition to the cap-and-trade scheme, or prohibiting certain sources from purchasing allowances. Third, any regulation of emissions raises costs, which has a disproportionate impact on low-income consumers. This effect can be greatly ameliorated through adroit use of revenue from emissions allowance auctions to offset the additional burden on low-income consumers from increased energy costs. The bottom line is that fairness issues are not a deal-breaker for cap and trade, but they do deserve thoughtful consideration in designing a system.