Can self-interest improve a public good such as air quality? The state Department of Environmental Quality (DEQ) has recently introduced a concept that may provide an answer—it’s called the Emission Reduction Credit (ERC) Trading Program. The Program, which became effective last March, is voluntary and it allows for the generation, use, averaging, and trading of ERCs statewide. The DEQ believes that the introduction of market forces (such as competition and prices) will help improve overall air quality of Michigan.

While the term "voucher" has become nearly synonymous with privatization in education, public housing, and social services, few may realize that there is a growing movement in the environmental community for "voucherizing" the right to emit pollutants. By choosing markets in addition to mandates, the Department of Environmental Quality (DEQ) hopes economic incentives will help job providers and consumers save money and protect the environment.

Polluting is not an option. Every living organism pollutes in order to survive, just as factories do. Even humans produce waste as a natural byproduct of living. It is ironic, but businesses that produce products which help keep the environment clean must emit pollutants in order to manufacture those goods. Emissions from all manufacturing processes can be dramatically minimized; however, at what cost? Should we make polluting so expensive that pharmaceutical companies can’t afford to produce life saving drugs? ERCs introduce greater incentives for balancing the need to pollute with the need to protect the public good of clean air.


ERCs introduce greater incentives for balancing the need to pollute with the need to protect the public good of clean air.


HOW IT WORKS

The ERC trading concept is simple: Create a market that allows people, nonprofits, government agencies, and businesses to buy and sell credits that they have earned by reducing their total emissions.

If my business is a source of pollutants, and I am able to reduce my emissions ten tons below that of any previous occasion, I will file a notice of credit generation for the DEQ. If acceptable, I may sell the right to emit nine of those tons to other organizations, while the DEQ retires the tenth. (The DEQ will not guarantee the authenticity and marketability of a credit.) If it is discovered that the company that applied for the credit did not reduce its emissions by the amount claimed, it may be subject to treble damages, and must either reduce its pollution output by three times the credit, or purchase and retire an identical amount on the open market.

In addition, the ERC program also gives private citizens and organizations the option to purchase credits for the specific purpose of denying polluters the opportunity to employ them. For instance, an environmentally concerned citizen could purchase a credit and present it to a friend as a gift. Regardless of how they are used, businesses, the environment, and citizens can enjoy a win-win-win solution to protecting air quality. In the past, solutions to environmental problems revolved around one-size-fits-all mandates that often included severe penalties for noncompliance. ERCs provide the people nearest the processes with an incentive and more flexibility to proactively reduce harmful emissions.

The program complements Michigan’s current air program by providing a market incentive for pollution sources to reduce emissions on several fronts. For example, credits may be used to comply with some Department of Environmental Quality regulations on pollution control technology. In the future, credits may be used in place of emission reduction technologies where the business demonstrates that the installation of additional controls would be economically unworkable.

EMISSION AVERAGING

Some manufacturing processes require higher emission of one pollutant and less of another. It may be less expensive to reduce emissions far below required levels on one or two coating lines (when painting cars, for instance) than installing emission control technology on all lines. Some companies that are subject to pollution reduction technology requirements have the option of reducing some sources significantly more than others. The term for this plan is "emission averaging." Imagine that an industrial site can reduce one pollutant by twenty percent, but another to only five percent. Under DEQ rules, the firm could average the two and remain in compliance. They are still required to provide the same ten percent overall improvement in air quality.

The ERC provides operational flexibility to companies faced with an increase in consumer demand for their product. Naturally, a production increase to accommodate that demand could result in exceeding a permit limit. These organizations may have the option of purchasing credits from other sources to compensate for the increased emissions to remain in compliance.

The program rules contain key prohibitions and restrictions designed to protect air quality. The massive purchase of environmental credits by one source, for example, cannot result in the violation of a National Ambient Air Quality Standard for a criteria pollutant (as determined by the EPA) like carbon monoxide or sulfur dioxide. Such rules are intended to prevent one source, or one geographical location, from polluting or becoming polluted due to the purchasing strength of one or more emission sources.

Many people believe that free-market incentives are an important factor to consider when attempting to improve environmental quality. The DEQ ERC program applies incentives to promote a positive environmental vision. It encourages voluntary association between distinct groups—businesses, scientists, environmentalists, and private citizens—while making it easier to conserve scarce economic resources and allowing the people of Michigan to breathe a little easier.