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Acid Test

Tom Tietenberg

Acid Rain and Environmental Degradation: The Economics of Emission Trading. Ger Klaassen. New Horizons in Environmental Economics Series, 336 pp. Edward Elgar, 1996. $80.

Emissions trading has been one of the more durable innovations in environmental policy over the past 25 years. Although the details matter, in essence, emissions trading not only specifies an emission limit (a characteristic it shares with most policies), but it also allows much greater flexibility in how that limit is met, including seeking offsetting emission reductions from other sources.

From rather humble beginnings in 1975, emissions trading has evolved into a major component of air-pollution control policy in the United States. Most recently it has facilitated the phaseout of lead in gasoline, has provided a means for reducing ozone-depleting substances in compliance with the Montreal Protocol and has been the centerpiece of the U. S. approach to controlling the sulfur emissions from power plants. Having been placed on the table by the United States, emissions trading has also become one component of the global strategy for combating climate change.

Emissions trading has been revolutionary in the sense that it has facilitated a rather stark change in the philosophy of air-pollution control policy in the United States. Traditionally the government was responsible for defining environmental goals, for dictating the best control technologies for meeting those goals, and for monitoring and enforcing compliance with its mandates. This proved to be an excessively challenging responsibility because of the sheer number of substances, sources and possible control strategies.

Although setting standards and monitoring and enforcing compliance remain government responsibilities, under emissions-trading stategies, emitters have the opportunity to use their own ingenuity to determine the best way to comply with the goals. Introducing this flexibility has resulted in substantially lower compliance costs, higher levels of compliance and more innovative ways to control pollution (including promotion of pollution prevention rather than more traditional end-of-pipe reduction technologies).

The programs in the United States have undergone a considerable evolution and have now spread to other countries. This book provides an excellent guide to this evolution. The road has not always been smooth. As a scholar at the International Institute for Applied Systems Analysis in Austria, Klaassen was heavily involved in providing expertise on emissions trading to those involved in the European negotiations on control of acid rain. His assessment is balanced and perceptive.

The first part of the book reviews the theory behind emissions-trading programs and surveys the types of evidence that can be assessed to extract the lessons about how well emissions trading has worked in a variety of contexts. The review of existing emissions-trading programs (including three that have emerged in Europe) is thorough and highly readable.

The second part of the book, which considers how emissions trading might be incorporated in the emerging European policy to reduce acid rain, may be of somewhat more limited value to a nonspecialist audience in America. These chapters deal with the European institutional framework and the influence that framework would have on the design of a European version, the forms of emission trading that might be used in Europe, and the results of simulation models used to evaluate the various possible approaches.—Tom Tietenberg, Economics, Colby College

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