South-Western College Publishing - Economics  

An International Market in Pollution
Subject Pollution and International Trade
Topic International Trade
Key Words Clean Air Act of 1990, President Clinton, International Trade, Pollution
News Story President Clinton has proposed establishing emissions as a commodity that can be traded internationally. This proposal would be an international extension of a system created domestically under the Clean Air Act of 1990. Under this system, business that voluntarily reduce emissions below some required level would be permitted to sell this difference to other firms as a right to pollute. The potential gains from international trading of pollution permits, especially in carbon emissions are great. The developed world would have great difficulty in achieving proposed reductions in carbon emissions if the standards were applied uniformly. That is because the capital equipment in place is complex, expensive, and may already have incorporated some emission reduction devices. The developing world, on the other hand, has not yet made the large investments required of industrialization and, in many cases, these countries can still preserve natural carbon sinks.

There are many potential difficulties in establishing international trading in pollution permits. Establishing emission reduction goals, monitoring and insuring compliance to name just a few. Policy makers must choose between the efficiency of trading pollution rights compared with regulation as a means of achieving emissions goals and the difficulties that are likely to be encountered in establishing an international market for pollution rights. (Updated January 15, 1998)

  1. Assume that an international market in pollution rights is established with the product being a pollution permit. Who is likely to be a buyer of such permits? How would that transaction appear in the balance of trade accounts?
  2. Which countries are likely to be sellers of pollution permits and how would these transactions be represented in their balance of trade accounts?
  3. How would the demand and supply for these pollution permits affect the value of the dollar vis-à-vis a developing country’s currency?
Source Peter Passell, "Trading on the Pollution Exchange," The New York Times, October 24, 1997

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