Negotiable pollution credits.
There are some industries that produce certain undesirable byproducts (say, Chemical X) as part of their operations. For some of those industries (say, Industry A), creating Chemical X is economically necessary. If the U.S. forces Industry A to reduce its Chemical X output by 5%, Industry A's costs will rise by 5%. If the U.S. forces Industry A to reduce its Chemical X output by 20%, Industry A's costs will rise by 50%. And if Chemical X is reduced by 50%, Industry A will cease to exist in the U.S.
For other industries (say, Industry B), producing Chemical X is only economically valuable. So if the U.S. forces Industry B to reduce its Chemical X output by 5%, its costs will rise by 1%. If Industry B is forced to reduce its Chemical X output by 20%, its costs will rise by 5%. And if Chemical X is reduced by 50%, Industry B's costs will rise by 20%.
Under an old regulatory structure, someone would propose a 20% reduction in Chemical X. Industry A would fight it, pointing out that if such a regulation were enforced, Industry A would have to double its prices, hurting consumers, and eventually leading to the downfall of Industry A in the U.S. Industry A would likely win that argument, either completely negating any regulation, or placing it closer to a 5% reduction.
Under the negotiable pollution credit regime, you can get your overall reduction in Chemical X at something approaching the 20% level. Why? Let's say both Industry A and Industry B currently produce 1,000,000 tons of Chemical X every year. Now they're given 800,000 "credits," each of which is permission from the government to create one ton of Chemical X, after which the fines start coming (and let's say that each uncredited ton of Chemical X is going to equal about 1% of Industry A's current costs).
If the "credits" were nonnegotiable, this isn't very different from the old system. Industry B would almost certainly make the modifications to its processes (increasing its costs by 5%) and use all 800,000 credits. Industry A may make a few modifications, reducing its Chemical X output by 5% (also increasing its costs by 5%), use all 800,000 credits, then hope it doesn't get caught when it creates 150,000 uncredited tons of Chemical X, because a 150000% increase in costs is likely no different than going out of business.
Now watch what happens when the "credits" become negotiable. Industry B makes modifications, increasing its costs by 20%, to reduce its Chemical X output to 500,000 tons per year. It takes the other 300,000 credits and sells them to other industries. Industry A would purchase 150,000 credits from Industry B at a price less than 45% of its costs (because if more, Industry A would simply make its own modifications), but more than 15% of Industry B's costs. Looking good. Looking very good.
For other industries (say, Industry B), producing Chemical X is only economically valuable. So if the U.S. forces Industry B to reduce its Chemical X output by 5%, its costs will rise by 1%. If Industry B is forced to reduce its Chemical X output by 20%, its costs will rise by 5%. And if Chemical X is reduced by 50%, Industry B's costs will rise by 20%.
Under an old regulatory structure, someone would propose a 20% reduction in Chemical X. Industry A would fight it, pointing out that if such a regulation were enforced, Industry A would have to double its prices, hurting consumers, and eventually leading to the downfall of Industry A in the U.S. Industry A would likely win that argument, either completely negating any regulation, or placing it closer to a 5% reduction.
Under the negotiable pollution credit regime, you can get your overall reduction in Chemical X at something approaching the 20% level. Why? Let's say both Industry A and Industry B currently produce 1,000,000 tons of Chemical X every year. Now they're given 800,000 "credits," each of which is permission from the government to create one ton of Chemical X, after which the fines start coming (and let's say that each uncredited ton of Chemical X is going to equal about 1% of Industry A's current costs).
If the "credits" were nonnegotiable, this isn't very different from the old system. Industry B would almost certainly make the modifications to its processes (increasing its costs by 5%) and use all 800,000 credits. Industry A may make a few modifications, reducing its Chemical X output by 5% (also increasing its costs by 5%), use all 800,000 credits, then hope it doesn't get caught when it creates 150,000 uncredited tons of Chemical X, because a 150000% increase in costs is likely no different than going out of business.
Now watch what happens when the "credits" become negotiable. Industry B makes modifications, increasing its costs by 20%, to reduce its Chemical X output to 500,000 tons per year. It takes the other 300,000 credits and sells them to other industries. Industry A would purchase 150,000 credits from Industry B at a price less than 45% of its costs (because if more, Industry A would simply make its own modifications), but more than 15% of Industry B's costs. Looking good. Looking very good.
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